News / Europe

EU Leaders to Continue Search for Economic Answers

European Council President Herman Van Rompuy during a news conference at the Moncloa Palace in Madrid, Spain, July 12, 2011
European Council President Herman Van Rompuy during a news conference at the Moncloa Palace in Madrid, Spain, July 12, 2011

European leaders may hold another crisis summit on the struggling eurozone as early as Friday. The euro currency area is experiencing another grim week - and America's own debt problems only add to the uncertainty.

More bleak news for 17-nation eurozone. This week, Moody's ratings agency cutting Ireland's debt rating to junk status - echoing similar action targeting Portugal last week. It predicts both countries will need a second bailout - like fellow eurozone member Greece.

Speaking from Spain Tuesday, European Union president Herman Van Rompuy sought to calm jittery markets.

"I am fully aware of the current tensions in the debt markets. But let me be very clear that there is a very strong commitment at the highest level to do whatever is necessary to safeguard the financial stability of the euro area," said Rompuy. "Leaders have to [rise] above their domestic political agendas and they will."

But European finance ministers meeting in Brussels earlier this week failed to come up with a clear plan of action. That might be left up to EU leaders, if they hold emergency talks on Friday.

At issue - how much the private sector should contribute to another Greek bailout and whether to completely overhaul the bloc's bailout fund to make it more flexible.

Gilles Moec, London-based co-head of European Economics Research for Deutsche Bank, says private sector involvement is mainly a political issue. "The idea - especially in the core [eurozone] countries - is to say the taxpayer should not be the only actor in the system having to pay for the bailout," said Moec.

Results from so-called stress tests of European banks are due out this week -- and they should show banks' resilience in limiting the spreading crisis - and their ability to contribute to a bailout.

While unlikely, chances the United States could default on its massive debt is another concern. U.S. central bank chief Ben Bernanke has warned such a scenario could trigger a major world crisis.

"All these discussions about the debt ceiling in the U.S. are clearly not helping in the sense that it's adding another layer of anxiety in the situation, which is already complicated enough," said Again Deutsche Bank's Gilles Moec.

A more immediate worry, says Bruegel think tank researcher Benedicta Marzinoto, are fears larger European economies will be pulled into the eurozone debt crisis. Markets nosedived this week over fears about the health of the Italian and Spanish economies.

"Things have certainly deteriorated, because financial markets are attacking large markets like Italy and Spain. I'm more concerned about the two big countries than about the downgrading of Ireland - which in a sense was inevitable, if you think of a contagion from Greece," said Marzinoto.

Italian Prime Minister Silvio Berlusconi has vowed to swiftly push through a contentious austerity bill. The initial reaction by analysts has been positive. But they say the EU still must come up with a long-term strategy for the eurozone - and there are fears that tough decisions may be pushed back until the fall.

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