By James Hertling - Jun 17, 2012 2:23 AM GMT+0400
Faced with Greek elections that threaten to result in only more
disarray, European leaders are set to turn their attention to safeguarding the
other 98 percent of the euro-area economy.
With investors and policy makers clamoring
for clarity amidst what Bank of England Governor
Mervyn King called
a “black cloud” over the world economy, Europe’s chiefs are preparing for their
fourth make-or-break summit in a year.
“They need to signal and
make difficult decisions as to what they want the composition and functioning
of the euro zone to look like,” Mohamed El-Erian, chief executive officer of
Pacific Investment Management Co., told Bloomberg Television June 15. “The
current form doesn’t work. There’s too many flaws.”
Before descending on Brussels June 28,
leaders first need to overcome differences on politics and policy. French
President Francois Hollande hosted
members of Germany’s opposition last week as he pushes plans, which German
Chancellor Angela Merkel rejects,
to jointly guarantee debt and provide stimulus to counter recession in the
17-nation bloc. Spain’s foreign minister said June 14 that Germany helped
trigger the crisis.
“Investors outside Europe lack confidence --
we feel this every day -- in Europe and
the euro area,” Merkel said in a June 15 speech in Berlin. “But there’s also a
lack of trust among the different actors. That trust must be restored.”
Merkel at G-20
Merkel, whose role as leader of Europe’s
biggest economy gives her an effective veto on crisis-fighting policy, gets
down to business at the summit of leaders from the Group of 20 nations
beginning tomorrow in Los Cabos, Mexico. Global leaders will probably press her to give
ground on her austerity-first policy, as they did at the G-8 summit last month.
Merkel then meets in Rome on June 22 with
Hollande, Italian Prime Minister Mario Monti and
Spanish Premier Mariano Rajoy, seeking to find common ground before the EU
and euro-area summits at the end of the week.
“More important than the summit is the
gathering of the big four,” said El-Erian. “They hold the key.”
The anticipation echoes the expectations that
preceded gatherings last July 21, when a second bailout agreement for Greece
was outlined; October 26, when bondholders accepted a Greek writedown and the euro
rescue fund was beefed up; and Dec. 9, when new budget rules were adopted. None
of those steps arrested the crisis.
Greek Gridlock
Today’s Greek elections carry the latest
threat of stoking the turmoil, as polls show the anti-bailout Syriza party
running neck-and-neck with New Democracy, which says a vote for Syriza risks a Greek
euro exit. Polls also suggest no clear majority, bringing the prospect of
further political gridlock.
The election is a week after Spain said it would seek a 100 billion-euro
rescue for its banks, prompting concern Italy would be next to succumb.
“I don’t think the election results will
determine the future of Europe, because I see scope for compromise from both
sides,” Martin Blum, co-head of asset management at Ithuba Capital in Vienna,
said in an e-mail. “I do think that contagion from Spain to Italy and the
quality of the policy response at the EU summit will, however, be important in
determining the future of Europe.”
The German chancellor gave a pair of speeches
last week laying out her priorities for the Mexico summit that signaled she was
staying the course.
‘Quick Solutions’
“Germany will not be persuaded of all those
quick solutions such as euro bonds, stability bonds, a European
deposit-insurance fund,” Merkel told small-business leaders in Berlin on June
15 to applause.
Since his election on May 6, Hollande has
advocated moving toward euro bonds, echoing a position backed by Merkel’s
domestic opposition and EU officials in Brussels.
“In the financial circles, few doubt that it
makes economic sense to create a deep, liquid and stable market for government bonds with the joint issuance of public
debt,” EU Economic and Monetary Affairs Commissioner Olli Rehn said June 15, according to the text of
a speech prepared for a Goldman Sachs Group Inc. conference in Brussels that
was closed to the press.
Monti has joined Hollande in calling for
greater emphasis on policies that promote economic growth. On June 13, Monti
said the summit needs to adopt a “credible package of growth measures” to
reduce Italy’s borrowing costs.
Italy’s 10-year bonds yield reached 6.342
percent this week, the highest in almost five months, ending the week at 5.926
percent, 449 basis points more than comparable German debt.
Fiscal Union
The euro’s guardians will also debate a
blueprint being devised that may chart the way out of the crisis and toward the
full union that Merkel envisions. Drawn up by EU President Herman Van Rompuy,
European Commission President Jose Barroso, Luxembourg Prime Minister Jean-Claude Juncker and European Central Bank President Mario Draghi, the plan
may echo the euro’s 1989 roadmap set out by a panel led by then-European
Commission President Jacques Delors.
“The important thing as far as we are
concerned today is that this report in a sense spelled out a methodology,”
Draghi told reporters June 6. “There was a road with dates, deadlines and
conditions to be satisfied. I think that is part of the efforts that our
leaders and we, ourselves have to draw up today.”
To contact the reporter on this story: James
Hertling in Athens via jhertling@bloomberg.net
To contact the editor responsible for this
story: James Hertling at jhertling@bloomberg.net
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