The lull is over. After enjoying a long period of relative calm, the euro zone is heading into new turbulence this week as E.U. leaders meet in Brussels for a scheduled two-day summit.
While Americans take the day off to eat their Thanksgiving turkeys, E.U. leaders are expected to engage in some less-than-convivial sparring over two highly sensitive issues, and the outcome could be a new period of financial instability for the euro. The summit is officially supposed to finalize the E.U.’s 1 trillion-euro annual budget from 2014 to 2020, but risks ending in acrimony between Britain and its 26 partners over the amount of spending. The British government has signaled that it wants to see significant cuts in the central E.U. budget at a time when national governments everywhere are reducing their spending — but it’s running up against strong opposition from France and others, who want to maintain the status quo.
Even before the E.U. leaders sit down together, there’s serious tension in the air over the failure early Wednesday by finance ministers of the 17 euro-zone countries to reach an agreement on a package of loans that Greece urgently needs to pay off debts coming due before the end of this year. An estimated 7 billion euros in treasury bills are coming due in December; already last week, Greece had to issue short-term debt to roll over about 5 billion euros of that for another month.
At stake is a 44.6 billion-euro package that is part of a bigger bailout program previously inked with Athens. The process of disbursing the loans has been held up by a dispute between the E.U. and the International Monetary Fund over whether and how to provide deeper debt relief to the Greek government. The IMF is pushing for European governments to agree to a restructuring that would cut Greece’s debt to 120% of its economic output by 2020. (It’s currently about 176% of GDP.) But Germany and some others are balking, since such a restructuring would require granting more debt relief beyond what has already been agreed. Instead they are seeking to push the deadline back by two years, which the IMF isn’t willing to do. Both sides need to agree on the package, which is financed jointly.
The details of the disagreement are intricate, but the net result is that Greece is having to wait for the next tranche of its money — and it’s furious. The government recently passed a tough new package of austerity measures that was a condition for the money to be disbursed, braving fierce public protests. “Greece has done what it had to and what it had committed to doing,” Prime Minister Antonis Samaras said. “Our partners, along with the IMF, also must do what they have undertaken.”
Various proposals for unblocking the situation are under discussion. One of them involves lending Greece an additional 10 billion euros so that it can repurchase its own private-sector debt on the secondary market, where it’s trading at a fraction of its par value. Ministers will meet again next week with the IMF to see if they can forge a compromise. Christine Lagarde, managing director of the International Monetary Fund, said the positions have narrowed — but it remains unclear whether they can be bridged.
On the budget front, compromise looks even murkier. British Prime Minister David Cameron has been pushing for the E.U.’s budget to be cut rather than capped, and is taking special aim at the layers of top E.U. officials who have so far avoided the sort of austerity measures that have taken hold elsewhere. Bashing “fat-cat Brussels bureaucrats” tends to play well with a domestic British audience. The U.K. is not alone in pushing for budgetary rigor — the Netherlands and Sweden are among the countries sympathetic with more cautious spending — but its calls for a spending freeze at 2011 levels would actually mean a significant reduction in the budget, and that’s not acceptable to many other E.U. members.
The E.U.’s budget is actually paltry compared with the size of the combined economies, and about one-third of it is spent on subsidies to European farmers, as part of the controversial Common Agricultural Policy. The other major elements are infrastructure spending on cross-border railways, pipelines and broadband Internet connections, as well as subsidies to more recent and less wealthy members of the E.U., through so-called cohesion funds.
The budget — and Britain’s position on it — has long been a sore point because the U.K. since the era of Margaret Thatcher has received an annual rebate. That’s because Britain pays in substantially more than it receives back from the E.U. budget, largely because its agriculture sector receives fewer subsidies. France, on the other hand, is the single biggest beneficiary of agricultural subsidies, and thus has a strong vested interest in keeping the E.U. budget at its current level.
The worst-case scenario of a budget blockage and no agreement on Greece will overshadow considerable progress that has been made in the past few weeks in easing the euro crisis, thanks in large part to the European Central Bank’s announcement that it will fight off market attacks on the euro by buying up the bonds of countries receiving bailouts. But if fears again resurface about a possible Greek default, the markets are likely to become restive. The failure of the finance ministers to come up with a deal this week immediately hit the euro and stock markets around Europe. So, no turkey this Thanksgiving for Europe but rather a bad new case of indigestion.