EU LEADERS are drifting back from their holidays to the familiar strains of economic stress and uncertainty over their halting campaign to bring the sovereign debt emergency to heel.
With divisions deepening on asserting control over the debacle, the holiday season ends as it began. The International Monetary Fund is pressing hard for a huge capital infusion into European banks, but senior Europeans reject its analysis.
The return to the fray comes after an upsurge of tension in debt markets last month prompted a reluctant European Central Bank to buy up Italian and Spanish bonds for the first time. This served to relieve some of the immediate pressure but it is seen as little more than a short-term salve.
European leaders had sought to dispel doubt over their strategy to contain the debt debacle with an emergency July summit before their departure for the beaches.
They resolved to rescue Greece for a second time, expand the euro zone rescue fund and cut the interest rate on rescue loans for bailout recipients such as Ireland. However, much remains to be done to execute such measures.
Furthermore, critics have long argued that these manoeuvres in their own right do not go far enough. When a new bout of turmoil erupted on markets last month, European Commission chief José Manuel Barroso was quick to call for a big increase in the bailout fund. He was angrily rebuffed by Germany and the Netherlands.
At the end of the commission’s first post-summer meeting on Wednesday, Mr Barroso called for the “rapid and effective” implementation of the measures agreed in July. That remains subject to political vagaries in a clutch of euro countries.
Mr Barroso also said recent market turbulence “inevitably” had implications for the real economy. As if on cue, new figures yesterday amplified concern that the nascent recovery of the euro zone economy was running out of steam. The data suggests manufacturing is contracting after two years of growth. It comes after separate figures which show that unemployment continues to rise in the single currency area.
This is the backdrop against which Europe’s leaders this month will try to secure parliamentary approval for the bailout fund overhaul. With rebel members of the German government threatening to vote against the initiative, Chancellor Angela Merkel faces pressure within her own party and from its coalition ally for tighter parliamentary control of the fund.
Further doubt surrounds Finland’s pursuit of collateral from Greece to secure its support for the new rescue. European economics commissioner Olli Rehn – Finland’s member of the EU executive – took the unusual step yesterday of criticising his country’s finance minister, Jutta Urpilainen, for a lack of communication over the question. Mr Rehn expressed surprise at Ms Urpilainen’s failure to contact him personally.
Finland’s demand for collateral as a condition for contributing to the second Greek rescue has prompted a push for similar treatment from countries including Austria and the Netherlands. The German, Dutch and Finnish finance ministers meet next Tuesday in an effort to settle the question.
There are other doubts, among them the uncertainty over the precise amount of private participation in the second Greek rescue.
The extent to which the bailout fund will be able to intervene in secondary bond markets à la the ECB is also in question. The ECB has a free hand to buy bonds, but the fund may need a request from a distressed government, limiting its room for manoeuvre.