EU leaders head towards next eurozone showdown

A meeting of the European Union’s leaders in Brussels next week is shaping up to be a desperate struggle to shore up the eurozone.

With bond markets and credit-rating agencies increasingly concerned about disagreements in the eurozone, the price difference between Greek and German government bonds rose this week to record levels.

The European Council, which is to meet on Thursday and Friday (23-24 June), is scheduled to approve the details of a €500 billion permanent rescue fund for the countries that use the euro.

But those details have yet to be finalised and the agenda is further complicated by the need to thrash out an agreement on the terms of a second financial aid package for Greece.

The aid package is being held up by a dispute over whether and how private-sector bondholders should be forced to contribute.

Officials are hoping that a meeting of eurozone finance ministers to be held in Luxembourg on Sunday evening and Monday morning (19-20 June) will resolve the arguments. Germany is leading a group of countries that is insisting that private-sector bondholders contribute to the cost of a new package, estimated at around €80bn. But the European Central Bank (ECB) opposes any changes to the terms of Greece’s outstanding debts unless there is voluntary agreement of bondholders. The ECB fears that forcing restructuring could be viewed as a default by credit-rating agencies and trigger a sell-off of the debt of other eurozone countries.

Officials are also hoping that a meeting between Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, France’s president, in Berlin tomorrow (17 June) might make a crucial contribution towards agreement, since these are two of the chief protagonists in the conflict – with France particularly wary of Germany’s insistence on private bondholders taking a haircut.

Finance ministers from the 17 eurozone countries met in Brussels on Tuesday (14 June) but failed to find a solution.

Meanwhile, George Papandreou, Greece’s prime minister, is struggling to get the main opposition party to support economic reforms. Greece’s eurozone partners have made cross-party political support for the reforms a precondition of additional aid.

Rebecca Harms, a co-leader of Greens in the European Parliament, said that the EU’s leaders had “no choice” but to approve a new loan package for Greece next week in order to avoid a worsening of the eurozone’s debt crisis. “There is no alternative but to help Greece,” she said. Harms criticised EU leaders for their slow response to the Greek debt crisis. Wolf Klinz, a German liberal MEP who chaired a Parliament committee on the financial crisis, said he thought the German government would back down next week, but added “there will have to be a haircut sometime”. He was unconvinced that the Greek government was combating corruption and tax evasion. “I have the feeling they are not making progress in eliminating those issues. It is a catastrophe,” he said.

Thomas Klau of the European Council on Foreign Relations said: “The way this crisis has been handled has been extremely messy and has added to the nervousness on the markets. The players involved should have spent less time playing to the home audience and more time working on joint solutions.”

The summit of EU leaders starts in the evening of 23 June with a dinner at which leaders are expected to review the eurozone and the economic situation. This discussion is expected to explore details of the European Stability Mechanism – a permanent eurozone rescue fund – and changes to the EU’s treaties required for it to come into force in 2013. Leaders will also discuss measures they need to take to improve competitiveness.

On Friday, leaders are to discuss the EU’s migration policy. They are expected to agree to allow the temporary re-imposition of border checks within the EU’s Schengen area of borderless travel. The arrival of tens of thousands of migrants from north Africa this year has intensified demands for such a suspension clause, and for stronger involvement by the member states in managing the Schengen area.

Leaders will also endorse a recommendation from the European Commission that Croatia should be admitted to the EU in 2013.

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