EU has debt crisis deja-vu _ but stakes are raised

AP News
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Posted: Mar 10, 2011 3:17 PM
EU has debt crisis deja-vu _ but stakes are raised

Spot the difference:

Economists wonder how Greece will ever pay off its enormous bills. Borrowing costs for Europe's weakest states are at record highs. Credit downgrades come thick and fast while big question marks loom over the health of the region's banks.

And the Germans are blocking any requests for more help.

Spring 2011 in Europe looks eerily like spring 2010 _ except that the stakes are now higher and markets' patience appears to be reaching a breaking point.

The continent, especially the 17-nation eurozone, is still struggling to find its way out of a debt crisis that has already pushed Greece and Ireland to take massive bailouts. Investors are looking to the EU for a convincing plan that will keep the crisis from taking down Portugal and much bigger Spain _ a scenario that could threaten the future of the common currency.

Europe's leaders have promised such a "comprehensive response" by the end of the month. The grand bargain was supposed to create closer coordination to boost economic growth and completely overhaul the region's bailout fund, its main crisis tool.

But the mounting, uneasy feeling in markets is that the EU will fail to deliver.

"On every single occasion they have overpromised and underdelivered," Sony Kapoor, managing director of the think tank Re-Define, said of Europe's policymakers.

When the eurozone's heads of state and government gather in Brussels Friday for a key stopover ahead of the decisive summit on March 24-25, they will commit to keeping labor costs and public deficits in check to make their economies more competitive and their government finances more sustainable. They will also discuss lowering the interest rates on Ireland's euro67.5 billion ($93 billion) bailout and giving Greece more time to pay back its euro110 billion ($152 billion) rescue loan.

But the measures that markets have been waiting for the most _ namely giving the eurozone's euro750 billion ($1 trillion) bailout fund powers that go beyond big national loan packages _ already appear to be off the table.

European Commission President Jose Manuel Barroso and his Monetary Affairs Chief Olli Rehn set the stakes high in January, when they called on EU leaders to not only boost the size of the fund, but also to widen "the scope of its activity."

That scope, it soon emerged, could include buying the bonds of vulnerable governments to stabilize financial markets, giving countries short-term liquidity lines if they faced huge unexpected costs such as bank bailouts, or even lending governments money to buy back their own bonds and thereby cut down their debts.

The result was a period of relative calm on financial markets, which, policymakers said, should give Europe's leaders the necessary time to rethink their crisis strategy. Until now it has largely been cobbled together in Sunday emergency meetings with the Monday opening of jittery stock markets in mind.

But Barroso and Rehn may have promised too much.

Using the bailout money just to stabilize markets or buy up government bonds is "out of question," a German government official said Thursday. Any help to troubled countries can only come as a last resort and in exchange for strict conditions such as budget cuts and structural reforms, the official told journalists.

About the jitters in financial markets following this week's ratings downgrades of Spanish and Greek debt, the official said "I don't think it can be about reacting to singular events." He declined to be named in line with department policy.

The comments, in many ways, sum up what has happened in the eurozone over the past year.

On the one hand, much has been achieved. Governments bailed out Greece, set up the bailout fund that has since rescued Ireland, and even agreed to change the European Union's treaty to create a permanent rescue mechanism. Record highs for bond yields and ratings downgrades are now received with a certain stoicism.

But on the other hand, the underlying clash of interest _ with the haves on the one side and the have-nots on the other _ remains.

"In the core countries the electorate is simply not happy to provide more help and funding to the periphery," said Juergen Michels, an economist at Citigroup in London.

German Chancellor Angela Merkel faces an important election in the state of Baden-Wuerttemberg on March 27, just two days after the decisive summit. Elections in Finland, another fiscally strong country in the eurozone, are on April 17.

Together with the Netherlands, those two countries have formed a "coalition of no," that looks set to block any expansion of the bailout fund's powers, said Kapoor.

In some way, finding common ground is even harder now that voters in strong countries feel like they have already put up too much money, while citizens in weak states are reeling from the consequences of steep budget cuts and economic recession.

"The positions are more entrenched than they were last year, so the scope for action (for politicians) was much wider one year ago," said Kapoor.

But most analysts nevertheless think that the euro will survive even if the "comprehensive solution" disappoints. "The lock-in of being part of the eurozone is so strong and the exit costs are so high," said Kapoor.

And what might happen if the "comprehensive solution" fails to convince financial markets on March 25? The same as last year, a hastily called emergency meeting on a Sunday night, said Michels, possibly already on the first weekend of April.