German Chancellor Angela Merkel and French President Francois Hollande look into each other at a press conference after eurozone's big four meeting in Rome, June 22, 2012.
Once again, leaders of the 27 European Union nations are holding a crisis summit meeting to tackle a spreading economic crisis and shore up the floundering euro. Once again there are ambitious proposals on the agenda of the two-day meeting, which starts Thursday in Brussels. And once again, financial markets are waiting to pounce at any sign of indecision, leading some people to warn that this is a “make or break” summit. They include the legendary investor George Soros, who is giving Europe just three days to sort out its messes.
If this sounds like déjà vu all over again, that’s because it may well be. Over the past 30 months, the EU has bounced from one crisis summit to the next, agreeing on measures that sound bold but which, on further examination, turn out to be insufficient. The initial relief on financial markets switches back to renewed pessimism, and the troubles keep growing. The “big bazooka” that British Prime Minister David Cameron called for last October, an ambitious and credible political action plan that could bring an end to the crisis, remains as elusive as ever.
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So what’s different this time around? The short answer is: actually, quite a lot.
First of all, the financial situation in the 17-nation eurozone is getting worse. Greek voters narrowly averted disaster 10 days ago when they elected a new government that doesn’t want to ditch the euro, but the news from elsewhere is dire. Spain is now officially asking for a $125 billion bailout of its banks, which have been devastated by real estate loans gone sour, and it’s having serious difficulties in the bond market, where rates for its sovereign debt have hit a peak of about 7%. Mariano Rajoy, the Spanish Prime Minister, told parliament on Wednesday that EU leaders need to come up with urgent mechanisms to enable indebted countries to refinance more easily, warning that, “we can’t finance at current prices for too long.” Italy’s borrowing costs are also rising again, hitting 4.7% this week for two-year bonds.
Meanwhile Cyprus became the fifth EU nation to formally request help this week, because its banks, too, are in trouble as a result of the substantial amounts of Greek sovereign bonds that they hold. The size of the bailout is puny by comparison to Spain or Greece — about $12.5 billion — but the action is highly symbolic because Cyprus on July 1 takes over the EU’s rotating six-month presidency.
The second difference is that there are some significant new proposals on the table for a longer-term solution to the crisis. One set has been unveiled this week by Herman Van Rompuy, who is president of the European Council, the body that brings together the 27 EU governments. The 10-year roadmap outlines a path to a fiscal and banking union, and includes the establishment of a pan-European banking supervisor with powers to intervene and a deposit guarantee and bailout fund. In a letter to EU leaders accompanying the report, Van Rompuy said the challenge for the summit is, “more than ever before, to signal, in a clear and concrete manner, that we are doing everything required in response to the crisis.”
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The proposals sparked some interest in several European capitals, including Paris, but were quickly shot down in Germany, “Parts of it read like a wish list,” said Michael Link, Germany’s deputy Foreign Minister. Germany, in fact, is going into this summit more adamant than ever that it will not agree to any scheme that would involve joint financing of any nation’s debt through Eurobonds or similar financial instruments. Chancellor Angela Merkel told party colleagues on Tuesday evening that she wouldn’t agree to such plans “as long as I live” according to reports in the German press.
That stance may end up defining this summit, and leads to the third major difference: a growing public divergence over strategy between the traditional twin powers of European integration, France and Germany. Merkel is insisting that the only durable solution to the crisis is a clearly-focused effort by all European nations to reduce their debt and improve competitiveness, including with a more federal approach to economic and fiscal policy. France’s newly elected president, François Hollande, has argued just as forcefully that joint efforts including debt-financed moves to boost growth are what’s needed to alleviate the worsening situation. French officials say they are deeply skeptical that Merkel’s ideas for a more federal structure for economic policy are workable or desirable.
Merkel and Hollande met for dinner in Paris on Wednesday evening, but showed little signs of having patched over their differences. If they can over the next two days, this summit may prove to be a turning point. If they can’t, there’ll be a flurry of communiques aimed at leaving the impression of success but without much substance, if any. In that case, if past experience is anything to go by, Monday morning might well be the hell on financial markets that George Soros is predicting.