EU summit: Still searching for a solution

@CNNMoneyInvest January 30, 2012: 4:54 AM ET
European Union leaders are set to meet Monday amid hopeful signs for Italy and Spain, but concerns about a default by Greece continue to hang over the eurozone.

European Union leaders are set to meet Monday amid hopeful signs for Italy and Spain, but concerns about a default by Greece continue to hang over the eurozone.

NEW YORK (CNNMoney) -- European Union leaders will gather Monday for their first summit of the year. The good news is that conditions for Italy and Spain are improving. But the fate of Greece is still uncertain.

The official agenda is focused on striking a balance between more austere fiscal measures for nations with unsustainable levels of debt and policies that will help revive economic growth across the 17-member euro currency area.

The eurozone economy is widely expected to suffer a mild recession this year as governments cut spending to balance budgets. But too much austerity could make the recession worse.

"This is not a choice between fiscal consolidation and growth. We need both," said Jose Barroso, president of the European Commission, in a statement Friday.

The latest meeting of the European Council continues a string of summits EU leaders held last year as the debt crisis in the eurozone intensified. Now, with borrowing costs easing for Italy and Spain, officials are hoping to address deeper economic and political challenges.

But difficult debt negotiations in Greece have revived concerns about a default, and investors are growing worried about Portugal, where borrowing costs soared to record highs last week.

"There will be a lot more talk about growth and austerity," said Jennifer McKeown, an economist at Capital Economics in London. "That's helpful in the long run and could help prevent a future crisis, but it doesn't solve the current one."

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The leaders are expected to back a treaty that would speed up the implementation of the European Stability Mechanism, a move designed to strengthen the region's financial firewall, said Council president Herman Van Rompuy in a statement Thursday.

In addition, the leaders will continue to debate the details of a fiscal compact aimed at strengthening budgetary discipline and deepening political ties. The hope is this can be signed at the next EU summit in March.

The fiscal compact is "more symbolic than anything else" said Daniel Gros, director of the Centre for European Policy Studies in Brussels. "But they will hail it as big step forward."

The compact includes legally binding balanced budget requirements and new sanctions for member states that fail to comply with deficit rules. But it remains to be seen if the pact will be enforced more aggressively than existing budget rules.

"These are things they should have done a long time ago, but are only finding the courage to do now," said Gros.

Meanwhile, Greece and its creditors in the private sector have yet to finalize the terms of a deal to reduce the nation's overwhelming debt load. The restructuring is a key condition for Athens to secure more bailout money and avoid an all-but-certain default in March.

The deal has been held up by disagreements over how much of a loss investors will voluntarily accept on Greek bonds as part of a debt exchange.

But the Institute of International Finance, which represents the private sector, said Saturday that talks have progressed and an agreement could be reached next week.

The debt talks in Greece have raised fears in the bond market that Portugal could seek a similar agreement to write down its debts.

At the same time, borrowing costs for Italy and Spain have backed off painfully high levels over the past few weeks. Both nations have had success selling short-term bonds to private investors.

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This has allayed concerns in financial markets that the debt crisis is spreading to core members of the eurozone.

"There is a lot of unfinished business," said Alan Brown, chief investment officer at Schroders Investment Management. "But right now the immediate news background is quite favorable."

In addition, the European Central Bank has launched an aggressive new lending program aimed at preventing a deepening credit crunch in the banking system. The ECB pumped nearly €500 billion worth of long-term loans in to the banking system in December and will offer a second round in February.

Despite recent signs of progress, experts say the latest summit will probably not result in the comprehensive solution that EU officials struggled to produce at the numerous summits they held last year.

"It's quite optimistic to expect a big solution," said McKeown. "It's more likely to be a disappointment if there's any kind of surprise." To top of page

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