As the summit began, the heads of state and government remained deeply divided on some of the key issues they need to solve or risk renewed turbulence on financial markets across the globe.
The fear is that more delays and half-baked solutions could push not only Europe, but also much of the rest of the developed world back into recession, eliminate hundreds of thousands of jobs and even spell the failure of the euro, the common currency that is at the heart of Europe’s postwar unity.
“Our challenge today is not simply to save the euro. It’s to safeguard the ideals we cherish so much in Europe: peaceful cooperation amongst our nations, social cohesion and solidarity without prejudice amongst our people,” said George Papandreou, the prime minister of Greece, whose country kicked off the continent’s debt drama almost two years ago.
Whether Wednesday’s summit — which was expected to last deep into the night — would indeed turn out to be the grand solution the markets are expecting and the eurozone has been promising was unclear Wednesday evening.
In particular, there was still no agreement on how to cut Greece’s debt, which is set to top 180 percent of economic output next year. On this issue the 17-country eurozone remained locked in discussions with banks and other private holders of Greek bonds, who have been resisting a demand from the eurozone to take significant losses.
At the same time, the eurozone itself was divided over how far a restructuring of Greece’s debt should go.
German Chancellor Angela Merkel told lawmakers in Berlin that the goal was to bring Greece’s debt down to 120 percent of economic output by 2020. That would imply a cut of more than 50 percent to the face value of Greek bonds and may be more than private investors would be willing to accept voluntarily.
Merkel’s Austrian counterpart Werner Faymann told reporters that a cut of “40 to 50 percent is part of the debate.”
Germany has threatened to force losses on Greek debt holders if they don’t accept sufficient losses voluntarily, while France, the European Commission and the European Central Banks insist that any debt relief had to remain voluntary.
Doubts remained also over the second key issue on the table: How to give the eurozone’s bailout fund, the $612 billion European Financial Stability Facility, the firepower it needs to stop the crisis from engulfing large economies such as Italy and Spain and help prevent big banks from collapsing amid the worsening market turmoil.
“I think that effectively, it has to be able to intervene a good deal beyond ($1.4 trillion),” Belgian Prime Minister Yves Leterme said of the bailout fund, also known as the EFSF.
Since states have ruled out boosting their financial commitments to the fund, the eurozone was working on two complex schemes that would allow the EFSF to act as an insurer for new bonds from wobbly countries as Italy and Spain.
If the fund promised to compensate investors against the first 20 percent or 30 percent of losses in the case of a default, that would make those bonds a much safer investments. Spending some $347 billion on guarantees, could under that scheme attract new lending of up to $1.39 trillion.
However, before rich countries like Germany, France or the Netherlands are willing to sign up for such a scheme, they want assurances that countries that benefit from the fund’s protection will get their economies back on track.
Italian Prime Minister Silvio Berlusconi in particular was facing pressure to convince his eurozone colleagues of his reliability at Wednesday’s summit.
“Our Italian friends know exactly that we have to insist that tonight they tell us that we get important structural consolidation measures in Italy,” said Luxembourg Prime Minister Jean-Claude Juncker. “That is a must.”
More progress was in sight for a plan to force banks across Europe to significantly increase their capital buffers to ensure they can withstand growing market pressures and large losses on Greek debt. But the new bank rules affect the 27-country European Union, not just the 17-state eurozone, and the non-euro countries do not want to reveal details of the plan before the other main issues have been resolved.