Germany vs. Italy: At eurozone meeting, the battle is over urgent action
As Europe's leaders meet in Brussels today, Germany is pushing hard for long-term reform. But Italy PM Monti says Europe faces disaster if high borrowing costs aren't addressed quickly.
As Europe's leaders meet in Brussels today, Germany is pushing hard for long-term reform. But Italy PM Monti says Europe faces disaster if high borrowing costs aren't addressed quickly.
With Italy and Spain in acute crisis, Europe鈥檚 leaders convene in Brussels today for a summit that appears heavy on long-term reform, but scarce on short-term measures to quickly staunch聽the聽crisis.
Like 19 other summits since 2010, the two-day event is forecast as a 鈥渕oment鈥� in European history designed to show solidarity, contain the fear of spreading debt, and reassure markets as a crisis that started with Greece now threatens Italy and Spain, the third- and fourth-largest European economies. While expectations of the summit are low, analysts say that the key issue for for markets is the appearance of clear decisions, even if they are designed for the long term.
EU leaders will discuss a new 鈥渞oad map鈥� for closer integration, including establishing a European finance minister, a banking union, shared fiscal sovereignty, and the possibility of聽allowing Europe's central bank to be a 鈥渓ender of last resort,鈥� not unlike the Federal Reserve in Washington. The most contested聽plans are over ceding national fiscal powers to Brussels, and whether to share debt liability and the cost of the crisis across the eurozone.
Germany鈥檚 Angela Merkel said this week that she will noy agree to common debt in Europe 鈥渁s long as I live.鈥�
Italy鈥檚 appointed prime minister, Mario Monti, who just passed a crucial labor-law reform, sent a salvo back, saying Europe faces disaster if it can鈥檛 stop high debt costs that are sinking his economy and appear to be the result of EU delay and foot-dragging.
Mr. Monti said angry 鈥減olitical forces鈥� in Italy and elsewhere could win the day. Local聽sentiment, he told reporters in Brussels ahead of the summit, is: 鈥淟et European integration, let the euro, let this or that large country" rot.
Italy鈥檚 current benchmark 10-year bond costs are 6.3 percent; Spain鈥檚 costs are at 7 percent, considered unsustainable.
鈥淭he big problem at the meeting in Brussels is Italy,鈥� says Fran莽ois Heisbourg of the Foundation for Strategic Studies in Paris. 鈥淢onti is drowning and Brussels and Berlin are not helping him. If Italy goes under, any agreements won鈥檛 matter.鈥�
In January, at its most recent 鈥渟ummit to end all summits,鈥� the EU agreed to closer fiscal union; at the same time, the European Central Bank quietly loaned out some $1 trillion to more than 800 European banks in what was seen as 鈥渜uantitative easing,鈥� EU-style.
But as seen over the past two years, those measures did not sufficiently impress markets. Greece had one failed election in May, and its new government still needs $14 billion to meet expenses and wants to renegotiate its bailout terms.
Markets this spring attacked Spain and Italy just as they did Ireland and Portugal a little more than a year ago.
Yet EU officials have now gone further with a road map for a banking authority, a European finance minister, and to give the European Central Bank more leeway as a 鈥渓ender of last resort鈥� 鈥� all part of a major plan for a more federal Europe advocated in Berlin.
The banking union "elevates responsibility for supervision to the European level, and provides for common mechanisms to resolve banks and guarantee customer deposits," according to a draft of the road map signed by Herman Van Rompuy, president of the European Council.
How much sovereignty France and other European nations would cede to a central fiscal authority is unknown.
The meeting is also expected to agree to a 鈥済rowth pact鈥� to add $155 billion a year to bailout funds, and leaders will push growth and infrastructure projects.
鈥淚 would not dramatize this summit ... because you have seen many European summits these last years,鈥� says 聽Nicolas V茅ron, senior fellow at Bruegel think tank in Brussels. 鈥淥n the other hand, the next weeks are very important. You cannot allow yourself the luxury to let the summer go by without deciding anything.鈥�
Chancellor Merkel has the greatest say in Brussels and advocates a 鈥渟tep by step鈥� long term approach seen in the road map.
But unlike at the previous 19 grand summits, she is increasingly isolated and pressed by Italy's Mr. Monti and new French president Fran莽ois Hollande, among others 鈥� though it is unclear whether that matters.
Germany鈥檚 strategy appears to be to push austerity and long-term reform hard enough to force change, but not so far as to create outright collapse 鈥� a delicate task, analysts say, especially since the election of Mr. Hollande.
Merkel yesterday hung tough on a go-slow approach: "Because I know the expectations and hopes that are pinned on this summit, I will repeat 鈥hat cannot be said often enough: There is no quick solution and no simple solution. There is no one magic formula ... with which the government debt crisis can be overcome in one go."
While financial advisers at Paris based BNP and in Brussels at Natixis said that short-term solutions in Brussels today are in short supply, the most important is a clearer road map.
鈥淭he goal is to make the euro area a more homogeneous and coherent ensemble. What will be interesting is how the results will be presented after the EU summit Friday, and if there is a clear timetable, not only a statement of intent,鈥� says Philippe Waechter, head of economic research at Natixis Asset Management in Brussels. 鈥淭his is what the markets will pay attention to."
At the recent G-20 meeting in Los Cabos, Mexico, and since, Monti has pushed a plan for the European bailout or 鈥淪tability Fund鈥� created in 2010 to be able to buy bank debt directly, in order not to add sovereign debt to national books that sends borrowing costs soaring.
Merkel has so far opposed the Monti concept.