From left, Mariano Rajoy of Spain, François Hollande of France, Angela Merkel of Germany and Mario Monti of Italy.
By JACK EWING Published: June 24, 2012
FRANKFURT — If the past is any guide, European Union leaders will leave their summit meeting this week waving promises to weave the euro zone more tightly together. They are likely to back a plan to finance infrastructure projects in stricken countries.
But unless the usual expressions of resolve are bolstered by concrete action or at least a binding timetable, financial markets are likely to continue to penalize Spain and other troubled countries by pushing up their borrowing costs to levels that will eventually prove unaffordable.
“We know by experience that recent summits have generated expectations that were not met by decisions,” Joaquín Almunia, vice president of the European Commission, said in Frankfurt last week. “We at the European Commission hope that this time will be different.”
The ideal outcome from the meeting in Brussels on Thursday and Friday, as a rising chorus of central bankers and foreign leaders has made clear, is deliberate movement toward a euro zone in which countries would backstop one another’s banks and bonds, while at the same time policing one another’s spending.
On Sunday, the Bank for International Settlements, a clearinghouse for central banks whose board includes the Federal Reserve chairman, Ben S. Bernanke, was the latest to urge euro zone leaders to establish a banking union, including stronger measures to guarantee deposits and prevent bank runs. The International Monetary Fund and the European Central Bank have made similar pleas.
European leaders are not blind to the dangers confronting the euro zone.
Wolfgang Schäuble, the German finance minister who is known as an advocate of a stronger European central government, said in an interview published Sunday that Germany may need to hold a referendum on a new constitution within several years, to make it easier for the country to cede budgetary authority. “In some important political areas we need to transfer more jurisdiction to Brussels, so that not every decision can be blocked by any member state,” Mr. Schäuble told the magazine Der Spiegel. [ http://www.spiegel.de/international/europe/finance-minister-schaeuble-euro-crisis-means-eu-structures-must-change-a-840640.html ]
In another indication of the pressure that leaders feel, Chancellor Angela Merkel of Germany is scheduled to meet President François Hollande of France in Paris on the eve of the summit meeting. The two leaders are expected to try to build at least a working relationship, as Ms. Merkel had with Mr. Hollande’s predecessor, Nicolas Sarkozy.
The reason European leaders are not expected to do anything drastic is that they have not been able to find a way to break the fundamental deadlock between northern countries, led by Germany, and southern countries like Spain and Italy and their ally, France.
Leaders like Mario Monti, the prime minister of Italy, want to co-opt Germany’s stellar credit rating to lower their own borrowing costs. Ms. Merkel, backed by Germany’s central bank and most of the German public, refuses to do that without also having much more say about how the Italians and others spend the money.
A meeting of leaders of the four largest countries in Rome on Friday suggested what might be expected from the full meeting this week. The leaders of Germany, France, Italy and Spain agreed to a 130 billion euro ($163 billion) growth pact, which mostly redirects existing funds. It would also create so-called project bonds, with the euro zone providing credit to private companies for infrastructure projects and job creation.
While helpful, the plan, which is expected to be formalized at the meeting, does not address the underlying weaknesses in the architecture of the euro zone.
“The outcome of the summit,” Commerzbank economists said in a note to clients, “will only be to produce an economic stimulus program which will have at best a limited effect.”
And so the euro zone continues to stumble toward what even normally restrained observers fear could be disaster. Spain’s borrowing costs continued their steep climb last week and, without decisive action on a grand vision for the region, are bound to be punished in the week ahead.
The days leading up to the summit meeting are likely to be tense, adding to the feeling that European leaders are running out of time.
“The very survival of the euro is under threat,” Athanasios Orphanides, until the end of May a member of the governing council of the European Central Bank, said in Frankfurt last week.
Greece’s new government must in the days ahead satisfy voter expectations that it will be able to renegotiate the austerity imposed by international lenders.
Spain is expected to begin bargaining with European officials about the terms of a bailout of its banks, who need as much as 62 billion euros in fresh capital, according to audit reports last week.
Spain illustrates the dysfunctional relationship between banks and governments and why a banking union is seen as urgently needed. After European leaders committed 100 billion euros, or $125 billion, to recapitalize Spanish banks this month, market relief lasted only a few hours. Investors realized that the Spanish government, whose size is dwarfed by the country’s banks, was still liable for the cost of the bailout. The additional burden made Spain look even less creditworthy than before.
A banking union would go a long way toward insulating countries from the woes of their banks, and vice versa, proponents say.
While everyone agrees that it will take years to forge the euro zone into a unified entity with some of the federal aspects of the United States, elements of a banking union could be put into place quickly, said Mr. Orphanides, a former high-ranking economist at the Federal Reserve.
For example, countries could agree to impose a levy on banks that would be used to create a central deposit guarantee fund — a European Federal Deposit Insurance Corporation. The fund might reassure depositors and stop the slow-motion bank runs already under way in Greece and developing in Spain.
“Solutions exist if there is the political will to use them,” Mr. Orphanides said at a conference at the University of Frankfurt.
The deposit guarantee fund would be part of a banking union. Mario Draghi, president of the European Central Bank, is expected to make a banking union the centerpiece of a vision for the euro zone he is drafting with three other leaders who, like him, have responsibilities that span national borders.
The other drafters are Herman Van Rompuy, president of the European Council; José Manuel Barroso, president of the European Commission; and Jean-Claude Juncker, head of the euro group of euro zone ministers. They plan to present their ideas to the European leaders in Brussels.
But the political obstacles to a common deposit guarantee fund and other features of a banking union remain high. A banking union would require a European bank regulatory agency with real power. Political leaders continue to be reluctant to give up control of their own banks, which they can use to steer financing to pet projects.
Germany remains wary of any plan that it would wind up paying the most for. The Bundesbank, Germany’s powerful central bank, has expressed doubts whether a banking union is possible without much tighter political integration of the euro zone countries.
“For sure it is not a quick fix,” Andreas Dombret, a member of the executive board of the Bundesbank, said in an interview. He added that it also would be important to keep an eye on whether such a plan raised constitutional issues. Germany’s highest court has been wary of measures that commit German money without legislative approval.
Germany also is unlikely to budge in its refusal to pool euro zone debt, at least until a fiscal union is in place that would allow euro zone countries to veto excess spending. Mr. Monti has proposed using European bailout funds to intervene in debt markets, to cap borrowing costs. But as far as German leaders were concerned, that idea was dead on arrival.
The European leaders will want to leave Brussels having accomplished something. They may endorse the idea of putting the European Central Bank in charge of bank regulation, a step toward a banking union. They will probably ratify the growth pact that Mr. Monti, Ms. Merkel, Mr. Hollande and Prime Minister Mariano Rajoy of Spain agreed to on Friday.
But the spending is not nearly large enough to solve the crisis, economists at Commerzbank said. That means that, this week anyway, European leaders are not likely to shake their reputation for doing too little, too late.
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