BRUSSELS (Reuters) - European leaders will try to breathe life into their stricken economies at a summit over dinner on Wednesday, but disagreement over the issue of mutual euro-zone bonds and whether they can alleviate two years of debt turmoil will dominate the gathering.
For the first time in more than two years of debt-crisis meetings, the leaders of France and Germany have not held their own mini-summit beforehand to agree positions, marking a significant shift in the traditional Franco-German axis.
Instead, new French President Francois Hollande will meet Spanish Prime Minister Mariano Rajoy in Paris to discuss policy, before the pair travel to Brussels for the 1800 GMT summit.
Despite fears that Greece could exit the currency bloc, Spain, where the economy is in recession and the banking system is in need of wholesale restructuring, is at the frontline of the crisis, with concerns that it could follow Greece, Ireland and Portugal in needing a bailout.
Hollande’s election victory has significantly changed the terms of the debate in Europe, with his call for greater emphasis on growth now a rallying cry for other leaders.
That has set up a showdown with German Chancellor Angela Merkel, who supports growth but whose primary objective is budget austerity and structural reform. While she and former French president Nicolas Sarkozy did not always see eye-to-eye, in Hollande she is faced by someone with a different vision.
In his first EU summit, Hollande has also chosen to make a stand on euro bonds - the idea of mutualising euro zone debt - despite consistent German opposition to an idea that has been hotly debated for more than two years.
He will have support from Italian Prime Minister Mario Monti and European Commission President Jose Manuel Barroso, among other leaders. But Merkel shows no sign of dropping her objections to the proposal, which she has said can only be discussed once there is much closer fiscal union in Europe.
The Netherlands, Finland and some smaller euro zone member states support her in that position, setting the stage for what could be a divisive discussion. Austria’s chancellor supports Hollande’s line, but the finance minister backs Merkel‘s.
“(Euro bonds) are the wrong prescription at the wrong time with the wrong side-effects,” Germany’s deputy finance minister, Steffen Kampeter, said this week, underlining Berlin’s view.
Or as one EU diplomat put it more colorfully: “Introducing eurobonds is the equivalent of ringing the bell for a happy hour so the inebriated can postpone their hangover indefinitely.”
No decisions will be made at Wednesday’s summit, which is intended to promote ideas on jobs and growth ahead of another meeting at the end of June, but it is clear the debate will be intense, not just over euro bonds but over how to rescue European banks and whether to give more time to struggling euro zone countries to meet their budget deficit goals.
EURO BONDS “ROAD MAP”
Olli Rehn, the European commissioner for economic affairs, threw his weight behind the euro bonds proposal on Tuesday, calling for a “road map” that sets out the legal and fiscal steps needed to deliver the instruments in the years ahead.
Herman Van Rompuy, the president of the European Council, the body which represents EU leaders, said heads of state and government should abandon taboos as they think about the future of Europe and its economic framework.
“It is not too early to think ahead and to reflect on possible more fundamental changes to economic and monetary union,” he wrote in a letter to the 27 EU leaders.
As well as exploring ways of resolving the sovereign debt problems that have torn the economies of Greece, Portugal and Ireland apart and threaten the stability of the euro, the leaders will assess how to stabilize their banking systems.
Spain is a particular concern, with a number of its banks laden with bad debts incurred by excessive lending during a property boom that has long since turned to bust and still has some way yet to go before it touches bottom.
The total amount of bad debt is estimated at more than 180 billion euros ($240 billion), while efforts to recapitalize and restructure the stricken banks have so far fallen short.
One proposal on the table is for the euro zone’s rescue funds to be allowed to recapitalize banks directly, rather than having to lend to countries for on-lending to the banks.
But that is another idea with which Germany is uncomfortable, even though Merkel said on Tuesday a way should be found to dismantle banks across borders, a possible nod to a pan-euro-zone bank restructuring scheme.
The formal agenda of Wednesday’s meeting is jobs and growth, and specifically three ideas policymakers hope will provide some near-term stimulus to the European economy, which registered no growth in the first quarter of the year and threatens to slip into recession.
On Tuesday, agreement was reached with the European Parliament on ‘project bonds’, instruments backed by the EU budget that can be used to finance energy, transport and telecoms projects alongside private sector investment.
A pilot programme, using EU capital of 230 million euros, will run until 2013 and if successful could lead to up to 4.6 billion euros of new investment, EU officials say.
There is also a proposal to double the paid-in capital of the European Investment Bank, the EU’s co-financing arm, to a little over 20 billion euros. That would increase its leverage and could eventually release up to 180 billion euros for investment in infrastructure.
Agreement on that proposal could be reached by the June 28-29 summit, but there remains opposition from some member states concerned that the EIB’s strong track record could be undermined if money is thrown at bad projects.
The third initiative is to redirect EU structural funds - money from the EU’s multi-year budget used to help poorer countries improve their infrastructure - to other areas where it might reap more immediate growth rewards.
The figures remain vague, and even if all three proposals were to be activated quickly - economists and analysts are not convinced that would provide a sufficient shot in the arm to the euro zone and wider EU economy.
Additional reporting by Jan Strupczewski in Brussels, Julien Toyer in Madrid and Catherine Bremer in Paris; Editing by Mike Peacock