Discord between EU leaders as Brussels summit begins

The two-day meeting of EU leaders in Brussels, which according to some sources could be the most crucial to take place since the founding of the European Union, begins on Thursday evening.

As financial markets express mounting alarm over the continuing euro zone crisis, leaders will discuss proposals for a banking and fiscal union and decide whether the Euro is beyond salvation.

Yesterday, however, German Chancellor Angela Merkel brushed aside calls from Spain and Italy for emergency action to lower their borrowing costs.

Spain’s central government’s deficit has already reached 3.41 per cent of annual gross domestic product this year – and is set to soon exceed its target for the whole year of 3.5 per cent.

Borrowing costs have spiralled as the government battles to recapitalise banks ravaged by a burst property bubble and cut the growing government deficit.

Spain has been offered loans of up to 100 billion euros to recapitalise. Determined to avoid a sovereign bailout, it is considering raising consumer, energy and property taxes.

Both Spain and Italy argue that they are making wrenching sacrifices to cut their mountainous debt and need support from their EU peers to keep the markets at bay.

Addressing parliament in Berlin on Wednesday, Ms Merkel accused top European Union officials of putting the cart before the horse.

“I fear,” she said, “that at the summit we will talk too much about all these ideas for joint liability and too little about improved controls and structural measures.”

In order to prevent Europe’s strongest economy from becoming overburdened, she insisted that those in need of assistance must give EU institutions the power to override their budgets and make them change policy before there could be any shared liability for Europe’s debt.

Her dismissal of repeated pleas for help reflects a discordant climate between European leaders amidst the still-widening debt crisis which erupted in early 2010 after Greece revealed the extent of its deficit.

The Greek crisis
Public spending in Greece soared after it adopted the Euro. While spending on public sector wages rose, widespread tax evasion reduced government income, leading to a spiralling budget deficit.

The country was ill prepared to weather the global financial crisis and, heavily indebted, was unable to repay its loans. In 2010 it was forced to ask for assistance from the IMF and the EU.

The conditions attached to the 110bn euro bailout package involved a severe austerity drive, further damaging Greece’s economic recovery. It has now been in recession for four years.

The recent general election has reassured the euro zone and the IMF. Yet if the Greek economy further contracts, it may need more help, which could reopen the question of Greece leaving the euro and set an unwelcome precedent for other struggling countries to do the same.

Berlin holds the euro zone’s purse strings and therefore nearly all the cards. Yet Ms Merkel finds herself in a dwindling minority in the EU, backed only by the Netherlands and Finland.

The EU’s divisions have been more openly displayed since socialist Francois Hollande ousted Nicolas Sarkozy as French president, putting an end to the Franco-German “Merkozy” leadership duo. Mr Hollande has openly challenged Berlin to move away from austerity, promote economic growth and mutualise Europe’s debts.

The Brussels summit is expected to agree on a growth package pushed by France worth around 130 billion euros in infrastructure project bonds, reallocated regional aid funds and European Investment Bank loans.

Stock markets were last week bolstered in anticipation of the summit providing dramatic measures to resolve the crisis. But the insistence from euro zone sources that there would be no short-term decisions or solutions led to a fall in the euro on Wednesday.