Italy and Spain threaten to block €120bn EU growth plan

ITALY AND Spain have urged EU leaders to take emergency action to contain their borrowing costs and raised the prospect that they may refuse to back Europe’s €120 billion growth plan if immediate steps are not taken.

The two countries, which are under mounting pressure on bond markets, made their plea on the opening session of a two-day summit in Brussels.

The meeting, which is expected to continue into the early hours, comes as Europe confronts mounting doubt over the rescue strategy for Spain’s stricken banks and anxiety that the turmoil could soon shut Italy out of private debt markets.

Tension was palpable in Brussels as leaders gathered for their fourth summit of the year and their 20th since the outbreak of the crisis in late 2009.

The leaders gathered shortly after 3pm in Brussels and it was 11pm before they started dinner. The mood in the summit chamber was said to be “tetchy” as Italy’s unelected premier Mario Monti led the charge to deploy Europe’s anti-crisis “firewall” and was backed by Spanish prime minister Mariano Rajoy.

A political source said the two leaders had adopted a “very strident” approach. “They’re very fired up. They’ve put down a marker.”

Mr Monti wants the leaders to instruct the European Financial Stability Facility and European Stability Mechanism bailout funds to buy up sovereign bonds on the open market to keep borrowing costs below a certain threshold.

Mr Rajoy supports this idea but he also wants the funds to be given the power to rescue banks directly.

Neither idea finds favour with Germany and chancellor Angela Merkel is said to have expressed annoyance at the state of affairs in the euro zone during what were described as “tough” talks.

Unfinished business in Brussels could jeopardise a key series of parliamentary votes in Berlin tonight in which she is seeking to enact the fiscal treaty and the treaty to set up the ESM.

In spite of Germany’s hard line, Taoiseach Enda Kenny held out hope for new measures to shore up the Spanish bailout. This is crucial as Dublin believes any fresh manoeuvre to help Spain may eventually be used to cut the cost of Ireland’s bank rescue.

“Europe is always about patience and about timing. Ireland was one of the first to put forward the measures of direct injections into banks,” Mr Kenny said as he arrived in Brussels.

“Issues that at first sight, first indications, seem to be rejected inevitably are left on the table and find a way of becoming a reality later on.”

Under the long-awaited growth plan, the leaders agreed in principle to provide €10 billion in new capital to the European Investment Bank, with a view to boosting its lending capacity by €60 billion.

They also resolved to reallocate €60 billion in unspent structural funds to countries which have not spent the money. The money would return to the EU budget otherwise.

Furthermore, they gave the go-ahead for an EU-backed project bond initiative to boost infrastructure investment by up to €4.5 billion.

However, both Mr Monti and Mr Rajoy reserved their position on the plan and said it must be accompanied by emergency steps to stabilise restive financial markets.

Although European Council president Herman Van Rompuy said the deal was essentially done, official observers of the talks said the possibility remained that neither Italy or Spain would endorse it.

The crisis increasingly pits Germany and its Dutch and Finnish allies against a growing band of opponents, Ireland among them, who want an immediate escalation in the battle to secure the single currency.

Agreement on the growth pact is necessary to ensure French president François Hollande ratifies the fiscal treaty.

He wants to widen the mandate of the ESM and the European Central Bank so they can take new steps to stabilise the euro zone.