European leaders concluded the latest round of talks over their prolonged economic crisis early Thursday morning but emerged still divided over how to boost a eurozone that faces a dizzying array of problems.
With banks in Spain, Italy and elsewhere dangerously short of capital, Europe’s leaders met for a dinner that lasted six hours and ended well after midnight - but seemed only to solidify the divisions between a German-led camp that favors following through with austerity measures and a group led by new French President Francois Hollande that favors increased spending to stimulate the economy.
No new measures are likely until after next month’s crucial Greek parliamentary elections, in which voters are expected again to reject the tough spending cuts mandated by a European bailout plan, a move that could trigger a Greek default, panic in the financial markets and a potential rupture in Europe’s grand experiment in political and fiscal union.
In a statement, the leaders said they wanted Greece to remain in the eurozone but follow through on the commitments it has made under the bailout plan. They noted that Greece has received nearly 150 billion euros ($189 billion) in fiscal support since 2010 and said that further European structural funds could be injected to boost the sinking economy -- if Greece doesn’t renege on its deal.
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“Continuing the vital reforms to restore debt sustainability, foster private investment and reinforce its institutions is the best guarantee for a more prosperous future in the euro area,” the statement said. “We expect that after the elections, the new Greek government will make that choice.”
Hollande said afterward that he had pressed the issue of Europe-wide bonds, backed by the creditworthiness of the entire monetary union, and that while some leaders were supportive, others were “totally hostile” to the idea. He mentioned German Chancellor Angela Merkel by name, saying that she disagreed with his view that the bonds could help inject much-needed cash into sagging economies.
“Mrs. Merkel doesn’t consider euro bonds as an element of growth but a long term tool of (European) integration,” Hollande said. “I have a different view.”
The debate over the bonds crystallized the philosophical differences that have brought European policy makers to a stalemate: Germany, which as Europe’s most successful economy would effectively have to risk its credit rating to underwrite any new spending, is loath to add to the continent’s debt without tighter fiscal controls. Over the long term, however, Germany has said it might favor the so-called euro bonds as a step toward closer fiscal integration.
Germany’s central bank said in a report issued earlier Wednesday that a default by Greece – possibly followed by its exit from the common currency, the euro – was a real possibility. But the Bundesbank’s harshly worded report made it clear that Germany won’t back any relaxation of the terms of the bailout and suggested that a Greek exit could be “manageable.”
“Greece is threatening not to implement the agreed reforms and consolidation measures in return for extensive aid, and this could jeopardize the continuation of the aid – with Greece having to bear the consequences,” it said.
“The challenges this would create for the euro area and for Germany would be considerable but manageable given prudent crisis management.”
Wednesday’s meeting – billed as an informal dinner among the leaders of the 27 European Union nations, including the 17 that use the euro as their currency – came a day after the Organization for Economic Cooperation and Development, a Paris-based research center, forecast that the eurozone would finish the year in recession and that it threatens to derail the fragile U.S. recovery.
The OECD report gave a boost to the pro-spending camp led by France, saying that all measures available, including Europe-wide bonds, should be tried.
The Obama administration continues to press Europe to look at what worked in the United States in 2008, policies that U.S. officials say helped return the nation to growth, albeit fragile, in short order.
The administration wants Europe to move more aggressively to capitalize its banks, something that the Bush administration did by injecting large sums of money into the largest banks, whether they wanted it or not, in order to reassure investors and depositors that the banks didn’t face imminent collapse.
The administration also is quietly pushing Europe to develop some form of deposit insurance, much like the guarantees on deposits provided by the Federal Deposit Insurance Corp., as a means of quelling potential bank runs if Greece or any other nation opts to abandon the euro.
President Barack Obama on Monday called on Europe to think bigger and move more boldly in resolving the slow-motion debt crisis, which has dragged on for two years. He criticized the continent’s piecemeal approach and cautioned that Europe’s woes are creating head winds for the U.S. economy, affecting exports and weighing on stock prices.
European leaders aren’t expected to meet again until late next month, after the Greek elections June 17, in which voters are widely projected to deal a defeat to parties that favor the bailout and its attached tax raises and spending cuts. Wednesday’s meeting, which European officials said would be a robust discussion but would lead to no big decisions, meant that Greek voters shouldn’t expect any bold signals from their neighbors before they head to the polls.
“Greece must stick to the commitments it’s already made, but it will need more time,” said an aide to British Prime Minister David Cameron, who spoke only on the condition of anonymity under diplomatic protocol.
“There’s going to need to be more flexibility from the eurozone,” the aide added, without offering specifics.
Leaders reportedly have agreed to a pilot program of bonds to finance a limited number of projects – such as railways and energy infrastructure – aimed at creating jobs and tying the eurozone economies more closely together. But experts and officials say such bonds are unlikely to deliver an immediate economic jolt.
Kevin G. Hall contributed to this report from Washington.