The leaders of France, Germany, Italy and Spain agreed to push for a growth package worth up to €130 billion ($167 billion Cdn) at a key European Union summit next week aimed at kickstarting the economy and safeguarding the currency bloc.
President Francois Hollande of France, German Chancellor Angela Merkel, Spanish Prime Minister Mariano Rajoy and Italian Premier Mario Monti, playing host, provided few concrete details beyond agreement on pursuing a financial transaction tax — something that Germany has championed.
Perhaps the biggest breakthrough of the brief summit was Merkel's acknowledgement that austerity alone won't cure the euro's woes. Merkel has come under increasing pressure to give ground on key pro-growth measures.
`'We say that growth and solid financials are two sides of a coin. Solid financials are not sufficient," Merkel said. Monti, who met with his fellow leaders at a government villa in Rome, is trying to build a bridge between Merkel's insistence on fiscal discipline and the focus on growth by recently elected Hollande.
He acknowledged that steps taken so far have not been sufficient, and that markets and European Union citizens alike need to view the euro currency as `'irreversible."
"'We maintain that if four countries as important and diversified as ours can find a convergent line, this can help force a strong consensus at the EU Council," Monti told a closing press conference.
Summit seen as crucial
Monti has warned of severe consequences for the 17 countries that use the euro and the world economy if next week's summit fails.
"A large part of Europe would find itself having to continue to put up with very high interest rates, that would then impact on the states, and also indirectly on firms. This is the direct opposite of what is needed for economic growth," Monti said in an interview with six European newspapers published Friday.
Without a successful outcome at the summit `'there will be progressively greater speculative attacks on individual countries, with harassment of the weaker countries," Monti said.
The €130 billion growth package discussed at the Rome meeting could include funds from unspent European Union structural funds, the European Investment Bank and European "project bonds" — debt sold to finance cross-border infrastructure projects.
The proposed financial transaction tax would charge banks 0.1 percent of the value of sales of stocks or bonds, and 0.01 percent per derivative contract with the proceeds going to fund future bank bailouts.
However, at a meeting of finance ministers from the 27 countries in the European Union in Luxembourg Friday, only 10 member countries were prepared to support the idea.
The Rome meeting caps an intense week for Europe in which markets have been roiled on fears that the region's governments will not come up with adequate measures to fight the debt crisis and that Spain and Italy might soon need bailouts that the rest of the eurozone could not afford.
There are worldwide fears that an economic crack-up in Europe could drag down the entire global economy. Europe is a substantial trading partner with the rest of the world.
Any deep recession in Europe will be felt in the order books of other leading economies — including the U.S.
At a meeting of Eurozone finance ministers in Luxembourg Thursday night, the head of the International Monetary Fund warned that the euro was under "acute stress" and urged leaders to consider measures — including jointly issuing debt — to alleviate the pressure on the region's debt-stricken members.
"We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area," Christine Lagarde said at a meeting of finance ministers late Thursday.
Germany has strenuously opposed the issue of joint debt — or eurobonds — because, while it would immediately ease pressure on countries like Spain, German taxpayers would be put on the hook for foreign debts and Germany's cost of borrowing would increase.
Asked in Luxembourg what Germany would think of her suggestions, Lagarde smiled and said "We hope wisdom will prevail."
Lagarde also Thursday said it was necessary to break "the negative feedback loop" that occurs when governments take on more debt to bail out their banks.
'The markets are beginning to question the viability of the European monetary union itself.'—David Lipton, International Monetary Fund
In Rome, Hollande said eurobonds need to remain a possibility `'and not in 10 years," without specifying a timeframe.
Rajoy spoke favorably about Monti's proposal to use bailout funds to buy bonds of vulnerable countries like Italy and Spain on secondary markets. The leaders said they would spend the coming days lobbying their EU counterparts.
A growing number of international leaders have called on Merkel and the eurozone to find quickly a comprehensive solution to the debt crisis rather than continuing to take piecemeal measures that provide only temporary relief.
At this week's G-20 summit of world economic powers in Los Cabos, Mexico, politicians, including U.S. President Barack Obama, called on Europe to do what was necessary. Speaking at an economic forum in St. Petersburg, David Lipton, first deputy managing director at the International Monetary Fund, urged European leaders to act quickly:
"The markets are beginning to question the viability of the European monetary union itself. It's very important that eurozone countries address the long-run question: Where is the architecture of the European monetary union going?"
"It's good that there is recognition that they have to move beyond austerity," said Luis Garicano, head of economics and strategy at the London School of Economics.
"But the big decision is not the move beyond austerity, it is to set up the short-term and long-term architecture for the Euro to separate the sovereign risk and the financial risk."