Thu December 16, 2010

Europe's Debt Crisis Tops Agenda at EU Meeting

European leaders are convening in Brussels on Thursday to discuss ways to steer the continent out of a debt crisis that shows few signs of abating, despite two multibillion-euro bailouts and European Central Bank moves to buy bonds of debt-ridden countries.

The two-day gathering comes just a day after violent demonstrations in Greece by protesters demanding an end to that country's austerity measures. Greece and Ireland needed bailouts earlier this year, and other countries such as Spain and Portugal are teetering under economic pressures as financial markets seem convinced the euro is on an unsustainable path.

The ratings agency Moody's warned this week that it may downgrade Spain's credit rating because of the country's deeply indebted banks and high debt funding needs. But the agency said that -- for now -- Spain may avoid the same fate as Greece and Ireland. Belgium also got a credit warning this week.

Critics say European Union leaders so far have failed to address concerns that deeply indebted countries among the 16 euro-using nations have realistic plans to get out of debt.

Despite frequent calls for unity and coordinated action, officials are divided on how to solve the crisis.

In Germany, Chancellor Angela Merkel robustly defended the euro during a speech to parliament Wednesday. "Nobody in Europe will be left alone, nobody in Europe will be left to fall. … Europe only succeeds as one," she said.

But Merkel's renewed call for unity was short on new ideas to address the yearlong debt crisis. She reiterated German objection to the idea of Euro Zone bonds out of the belief that sharing the credit risk among Euro Zone members would reward fiscal indiscipline and punish stronger economies.

"We must not make the mistake of collectivizing the risks, for example, with euro bonds, which may appear to be a solution but are in fact not in any way a solution. The solution is more balanced competitiveness among EU members, in particular in the Euro Zone," Merkel said to loud applause from lawmakers.

Despite continued calls for European cooperation, frustration with Germany and France is growing in some EU quarters. Luxembourg, a strong proponent of euro bonds, cautioned Germany and France -- the largest economies in the euro zone -- against power plays at the Brussels meeting.

Luxembourg's foreign minister, Jean Asselborn, warned Berlin and Paris about "haughtiness and arrogance which disregards the European spirit of solidarity" during an interview with the conservative German daily Die Welt. He added that "Germany will understand that their theatrical performances of the past months are of no use."

Even as much of Europe struggles, Germany's economy has bounced back from recession, and its export-driven economy is once again booming. But many analysts fear that the markets will carry on exploiting the absence of bold, concrete EU action.

The leader of Germany's opposition Social Democrats, Frank-Walter Steinmeier, said the government was ignoring the crisis and accused Merkel of "not listening to the alarm bells." And Jurgen Trittin, leader of the German Green party, criticized Merkel's dismissal of euro bonds as a rejection of what could be a "sensible instrument" to ease the crisis.

EU leaders have set up a temporary "stability fund," but some economists think they should come up with a long-term mechanism to transfer money from fiscally stable countries such as Germany and France to struggling nations.

At the meeting in Brussels, European officials are expected to debate treaty changes that would make the temporary crisis fund -- set to expire in 2013 -- permanent as well as a measure pushed by Berlin to defend the euro against financial turmoil. They also may discuss boosting the fund's size.

Still, no major decisions are expected.

Economics professor Irwin Collier of Berlin's Free University is not optimistic that European leaders will take decisive enough action to calm market speculation.

"Everything that will come will be of the muddling-through variety," Collier said. "Backs will be against the wall. Choices will be forced upon countries, simply because there seems to be no alternatives. But a genuine cooperative solution strikes me as being very unlikely in the near future."

Germany's finance minister, Wolfgang Schaeuble, signaled this week that Europe's largest economy is prepared to do more if current measures continue to falter. Schaeuble and other ministers have issued a stream of vague statements about doing what it takes to keep the euro stable while downplaying the need for greater economic integration. The fact that the common currency lacks a strong foundation of common fiscal policy has been a chief criticism of the Euro Zone for years.

Others are convinced that there is enough political momentum -- though perhaps not the means -- to ease the debt mess.

"I think there is immense political will to do what's necessary to do to save the euro from collapsing," said former U.S. Ambassador to Germany John Kornblum. "One shouldn't underestimate what the governments will do when pushed against the wall. The problem is that many of the governments are facing their own internal political problems, most of all the Germans."

Kornblum, who ran the State Department's European Bureau when the euro currency was adopted nearly 11 years ago, notes that the Germans responded to this crisis with the largest budget cuts in the post-World War II era and raised the age for full pension retirement to 67. But he says Merkel still faces tough battles ahead, including lawsuits challenging the constitutionality and legality of taxpayer-funded bailouts.

"The German Supreme Court is just as powerful as the American Supreme Court ... and in the back of her mind, she's got the German Supreme Court," Kornblum said. "If she gets a ruling against her on this kind of thing, it could forbid Germany from participating in any of these things in the future. That is a very big problem." Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.

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