At this stage, the lack of a breakthrough on a bailout would be deeply damaging, writes ARTHUR BEESLEYin Brussels
FOR THE second time in six weeks, Greece’s debt crisis is set to overshadow an EU summit.
Europe’s leaders tried to contain the malaise last month when they promised aid for Athens if needed. Their unspecific pledge wasn’t enough to appease the markets. Cue frantic talks to deliver something more tangible today or tomorrow in Brussels.
At issue is a simple question: can Europe’s top authorities spell out how they would provide emergency loans to Greece if the market baulked at extending the country’s credit line?
The answer will essentially be determined by German chancellor Angela Merkel, whose administration would inevitably provide the largest loans.
Dr Merkel has been reluctant to jump, defying urgent entreaties from European Commission president José Manuel Barroso, French president Nicolas Sarkozy and a legion of other leaders.
Little by little, however, Berlin has laid the ground for a deal by setting out basic rules of engagement. Although sources said Dr Merkel was still refusing to discuss the size of any loans yesterday, the sense in Brussels is that the expectation of a breakthrough has reached the point at which delivering nothing would be deeply damaging.
“If we’re not able to go on from what was agreed in February that would be perceived as a political failure,” said a senior European diplomat.
The affair raises fundamental questions for the EU as it strives to overcome the wrenching impact of an unsparing recession.
At what price a Greek rescue? How much and for how long? Same again next year? Would it be better to allow Athens to leave the euro? How to prevent a repeat elsewhere? How to preserve the independence of the single currency system if the International Monetary Fund (IMF) provides loans?
Not long ago, such questions would have been considered only in the abstract. These days, officials wrestle with them hour after hour. Currently under scrutiny, for example, is the alignment of conditions over any IMF loans with conditions over European loans. While the interest rate lever is a classic policy tool in any IMF rescue, that is seen as a no-go zone by the European Central Bank.
Fundamental flaws at the heart of the monetary union have been exposed. There is no lender of last resort in the single currency system and the fiscal rulebook was only loosely enforced for years. For a decade, the bailout ban was not truly tested. Greece’s descent into fiscal peril has brought all that to a head.
Plotting a way out is proving difficult in the extreme. Mere months after the adoption of sweeping measures in the Lisbon Treaty to make the EU work better, Europe is paralysed by uncertainty.
“What’s gone on in these past weeks is destroying all the progress made and is transferring into the market,” said former Belgian prime minister Guy Verhofstadt, now leader of the liberal group in the European Parliament. “We need clarity. It’s a bad thing, I believe, for Europe and the euro.”
In Berlin, however, Dr Merkel is confronted with a torrent of opposition to aid from the German public and within her own three-party coalition. Hence the talk of strict conditions over any loans and the adoption of stringent new surveillance measures which would empower Brussels to clamp down swiftly on countries with shaky finances.
The European Commission already has plans to intensify economic surveillance, although German sources have talked about reopening the European treaties to reinforce any new measures. This is something other EU members, Ireland among them, would be loath to do.
The mood is glum. “We don’t really know how long we have,” said a high-level diplomat of the Greek question, adding that “people are worried generally about the European economy and how to generate new energy and dynamism”.
All going to plan, EU leaders were to discuss their new medium-term economic plan. The EU 2020 initiative raises numerous conundrums for leaders as they face into an uncertain future.
Germany and Britain resist the imposition of top-down targets from Brussels, while the adoption of national targets for poverty reduction, educational attainment, and research and development spending has proved contentious in some quarters.
This raises a challenge for European Council president Herman Van Rompuy to ensure member states adopt targets in line with his declared agenda. Anything less would be a setback.
But it is Greece that dominates. As the EU confronts its biggest crisis in years, the question now is whether common ground can be found.