EU unsure of debt crisis remedies

Just before a gathering of European leaders on Thursday, protests rage and debt crises remain unresolved.

EU voting
Top EU officials remain mired in technical debates about ideal solutions to the Euro debt crisis [Reuters]

Disagreement over how to fight Europe’s debt crisis deepened on Wednesday, on the eve of a two-day summit of European leaders in Brussels, as violent protests fuel investors’ worries.

Amid Europe-wide political deadlock, the crisis’ effects rang out across the region. Rioters in Athens smashed cars and hurled gasoline bombs at police during a nationwide protest and general strike against the government’s latest austerity measures.

Meanwhile, rating agency Moody’s warned it may downgrade the debt of Spain, the eurozone country many economists say is too big to be bailed out.

Still, diplomats said the meeting of European Union heads of state and government Thursday and Friday would not result in any bold decisions to contain the escalating debt crisis.

Instead it will focus on a small change to EU treaties that sets up a new crisis mechanism agreed almost two months ago.

EU Paralysis

Calls for bolder actions, either increasing the eurozone’s $1 trillion bailout fund or creating pan-European bonds to boost confidence in the euro, have been growing louder.

German Chancellor Angela Merkel – so far the most ardent opponent of both proposals – was attacked by her country’s biggest opposition party for her stance.

In an opinion piece in the Financial Times, the parliamentary leader of the Social Democrats, Frank-Walter Steinmeier, and Peer Steinbrueck, Germany’s former finance minister, called for a “more radical, targeted effort to end the current uncertainty”.

They made the case for a partial restructuring of the debts of Greece, Ireland and Portugal, guarantees for the bonds of stable countries and the limited introduction of pan-European bonds.

And EU officials have indicated that an increase in the bailout fund has not been ruled out.

Jose Manuel Barroso, president of the EU’s executive Commission, said the European Financial Stability Facility, while far from exhausted, “can be improved and adapted”.

However, he also asked politicians to focus on solutions to the crisis for which a political consensus was possible.

“What we don’t need is a beauty contest between leaders, a cacophony of diverging scenarios, or announcements that are not followed by action,” he told the European Parliament in Strasbourg.

Olli Rehn, the EU monetary affairs chief, also speaking in Strasbourg, said it was a priority to make the current bailout fund “more agile and effective.”

His comments echoed a statement from Jean-Claude Trichet, European Central Bank president.

“On the EFSF I can say we are calling for maximum flexibility and I would say maximum capacity quantitatively and qualitatively,” Trichet told journalists on Monday night.

The pressure on European policymakers to find a way out of the debt crisis has remained high.

Next steps

Ratings agency Moody’s on Wednesday warned it may downgrade Spain’s debt because the government is vulnerable to a borrowing crunch next year, when the recapitalisation of weak banks could prove more costly than expected for public finances.

The agency, which lowered Spain’s rating in September, said it will review the rating again because of high financing needs in 2011.

However, it said that it does not expect the country to need a bailout.

Moody’s warning comes a day after Spain had to pay significantly higher interest rates when it sold $3.3bn in treasury bills to help refinance its debt load.

In Greece, the seventh general strike of the year protesting painful austerity measures imposed as part of its bailout earlier this year, grounded flights, closed factories, and disrupted hospital and transport services.

The Greek strike action was supported by several hundred members of the European Trade Union Confederation, who gathered in front of the European Commission headquarters in Brussels.

They demanded that EU leaders focus on spurring economic growth rather than imposing further bugdet cuts.

Portugal’s government, meanwhile, was expected to unveil further reforms designed to prevent the country from having to follow Greece and Ireland in seeking an international bailout.

Prime Minister Jose Socrates has held talks in recent days with trade unions and business leaders as his socialist government searches for ways of spurring economic growth despite potentially crippling austerity measures designed to cut sovereign debt.

The government was expected to announce its latest reforms after a weekly Cabinet meeting on Wednesday.

Portugal’s high debt and low growth have made it one of the weakest members of the 16-nation Eurozone, but the government insists it doesn’t need or want a financial rescue of the kind provided to Greece and Ireland.

Source: News Agencies