EU leaders aim to reshape euro as crisis bites

EU leaders began Thursday a two-day summit under intense pressure to overcome divisions on reshaping the eurozone and rescue the euro as turmoil battered top economies Spain and Italy.

The 27 EU heads of state and government began their talks amid jittery financial markets and calls from leaders around the world to find a solution to the debt crisis and save the euro bloc from a collapse with disastrous economic consequences.

The most likely concrete result from the first day of talks was a so-called "growth compact" -- a package of measures amounting to some 120-130 billion euros ($150-$160 billion) to boost output and create jobs in the eurozone.

The measures, agreed in principle by the leaders of France, Germany, Italy and France at a mini-summit last week, would redirect unspent EU funds to the most needy countries and bolster the coffers of the European Investment Bank.

"Growth must be at the heart of our commitments," said French President Francois Hollande as he arrived for the meeting.

Weighing in behind the new French leader, German Chancellor Angela Merkel agreed Europe needed growth to revive sluggish economies facing record 11 percent joblessness.

"We have worked out a good programme, in particular for future investment and to give young people a better chance at a job," she said.

"I hope that we can agree this pact today and give an important signal -- combined with the fiscal pact -- that on one hand we of course need solid budgets and on the other hand ... also growth and jobs," added the chancellor.

Opening the meeting, EU President Herman van Rompuy, said: "People in our countries are worried about the present and nervous about the future."

Leaders had to make progress on bolstering the crippled eurozone economy, van Rompuy insisted. "Europeans expect no less from us."

Ratcheting up the pressure, Spanish Prime Minister Mariano Rajoy warned his country could not withstand for long the high borrowing costs bond markets are demanding and cautioned that key bodies were running out of cash.

"There are many Spanish public institutions that cannot finance themselves," he warned on the sidelines of the meeting.

And just hours before the meeting, Italy had to pay higher rates on five and ten-year debt, amid ongoing market tension as the crisis creeps from the edges of the eurozone to the centre.

"There will be a domino effect across all of Europe. We need emergency measures," said Belgian Prime Minister Elio Di Rupo as he joined counterparts.

Despite a public show of unity on arrival for the meeting, deep divisions remained about how to tackle the immediate problem of spiralling borrowing costs.

Italy, Spain and France want the EU's bailout fund to buy government bonds on the market, driving down borrowing costs, as well as a move towards a joint pooling of debt in the eurozone.

However, Merkel has refused to bend on these issues, insisting that any bond-buying must be attached to strict conditions and repeating frequently that she considers eurobonds "economically wrong and counterproductive."

Berlin believes that pooling of debt should only occur at the end of a long process of deeper integration and more centralised control -- the other main concern for leaders at the summit.

Among integration proposals is a move towards a banking union with a centralised supervisory body, joint deposit guarantee schemes and the means to wind up failing banks.

Madrid wants the EU's 500-billion-euro ($622 billion) bailout fund to be able to recapitalise banks directly, but Berlin has insisted governments be responsible for the loans although this risks making the fragile sovereign debt position of stressed countries even weaker.

Analysts looked towards the powerful Frankfurt-based European Central Bank (ECB) to rescue the situation.

"Europe urgently needs to break the cycle of fear: It needs ECB action," wrote Holger Schmieding, chief economist at Berenberg Bank.

While the central bank "cannot fix underlying and structural problems", it has "the power to stop any market panic and prevent financial contagion," he said.

Stocks and the euro slid as the markets braced for disappointment, but one economist said even small results could be cheered.

"European politicians have done a fantastic job of lowering expectations ... which means that even the smallest 'breakthrough' may cause a short-term relief rally", said Kathleen Brooks, research director at Forex.com trading group.

Source: AFP

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