EU leaders will go into a brainstorming session Thursday in the first of three summits being held before Christmas in the hope of ending the year with a deal on a stronger economic and monetary union.
Although pressure on the euro has eased in recent weeks, European Union leaders gathering from 5:45 pm (1545 GMT) Thursday have to contend with a deepening recession and social unrest as well as divisions between Europe’s major powers on how to ensure the euro single currency can survive the debt crisis.
One of the hot-button issues is the plan for a single European bank regulator, the first step towards allowing the new eurozone rescue fund, the European Stability Mechanism, to directly help ailing lenders.
The 17 eurozone states largely support the proposal, although serious differences over timing remain, but their non-euro peers are uneasy that their banks operating in the bloc might face new regulation without their say-so.
Berlin has made clear that an idea for a single bank supervisor, agreed at a breakthrough June summit, needs to go slower and be less ambitious than some, including France, would like.
Britain in turn opposes any measure that could harm the interests of the City of London, one of the world’s biggest financial markets.
Meanwhile, there is little expectation of a breakthrough on Greece’s long drawn-out bailout at the two-day summit, where Spain’s financial and political woes will be high in leaders’ minds.
Many investors and analysts eventually expect a request for some form of bailout from the fourth biggest economy in the eurozone, but the issue appears undecided with Madrid reluctant to go down that road.
Spain gained critical breathing room Tuesday when ratings agency Moody’s held the country’s debt rating unchanged at Baa3, one step above “junk” grade, although it assigned Madrid a “negative outlook,” maintaining a threat to downgrade it if conditions deteriorate.
Moody’s cited the European Central Bank’s willingness to buy Spanish government bonds to stabilize its borrowing rate as well as the government’s commitment to implementing fiscal and structural reforms.
The US agency also credited the ongoing efforts to restructure the Spanish banking sector.
In a positive pre-summit sign from the EU’s economic powerhouse and paymaster Germany, Chancellor Angela Merkel praised both Athens and Madrid for agreeing to painful austerity measures and reforms.
Merkel, whose electorate remains reluctant to bail out any more ailing EU economies, said progress in southern European states had been “slower than we might have liked” but that nonetheless “something has changed in their way of thinking.”
During the talks, the 27 European leaders will also review relations with China, and discuss hotspots Syria, Iran and Mali.
But as ever, Europe’s battered economy will take precedence.
The leaders will discuss proposals to reinforce economic and monetary union drawn up by EU president Herman Van Rompuy, with input from European Central Bank chief Mario Draghi, Eurogroup head Jean-Claude Juncker and European Commission chief Jose Manuel Barroso.
Van Rompuy has suggested that reforms might include the pooling of debt, by the strong and the weak alike, so that the risk is shared by all eurozone members when they issue common bonds to raise funds.
France and Germany were quickly into the fray, trading barbs.
“You can phrase it any way you like — ‘Treasury bills, debt redemption funds or eurobonds’ — this type of debt issuance will not fly with our government,” said Germany’s Europe Minister Michael Link.
His French counterpart Bernard Cazeneuve said: “For us, it is ‘yes,’ just as clearly.”
The possible use of such ‘eurobonds’ is fraught, with Germany fearing this would give weaker eurozone states a free ride in the markets at its expense.
With the same aim of a stronger union, Germany on the other hand wants rapid changes to the base EU treaty to strengthen the role of the Economic and Monetary Affairs commissioner, currently Olli Rehn.
German Finance Minister Wolfgang Schaeuble said Merkel will present a plan at the summit, arguing that a “more mutual fiscal policy automatically means a limit on national budgetary sovereignty.”
After a November summit which will address the divisive issue of the next 2014-20 EU budget — another highly sensitive issue — it is hoped a December meeting will produce final answers on a way ahead and whether this will require difficult changes to the EU treaty, or rule-book.
“We want a quick adaptation of the treaty,” Schaeuble said.
