EU Prepares for Greek Aftermath as Summit on Euro Looms
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. The two largest parties, New Democracy and Syriza, are in a dead heat in parliamentary elections, according to an exit poll.
“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.
Merkel at G-20
“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, 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 next 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.
Euro-area finance ministers plan to hold a conference call after the election results come in to discuss their strategy, according to a European official. A statement is likely to be issued around 10 p.m. Brussels time, the official said.
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.
“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.
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.”
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