European leaders increased pressure on Italian Prime Minister Silvio Berlusconi to say how he will reach budget-reduction targets as German lawmakers prepared to vote on a revamped euro-area bailout package that officials raced to complete before a summit tomorrow.
Italy needs to back up commitments with “specific actions” and come up with “clear timing,” European Commission spokesman Amadeu Altafaj said in Brussels today after a crisis Cabinet meeting yesterday failed to announce steps to spur growth. Berlusconi is writing a letter describing initiatives he’s planning to fight the crisis, two Italian officials said, adding that the proposals will be presented at the summit.
The focus on Italy underscored a push by leaders to prevent the Greece-fueled debt crisis from swamping the third-biggest euro economy and piling risks onto France and Germany. Policy makers, pressed by politicians and investors around the world, are struggling to devise a plan that persuades markets they can stamp out the contagion.
“The package is likely to represent the turn of a corner in the European debt crisis, but it will not be a ‘one strike, the crisis is over’ sort of thing, simply because there is no such strike available to policy makers,” said Erik Nielsen, global chief economist at UniCredit SpA. “The key is to convince the market that policy makers can and will do what’s necessary, and here the Europeans have a more complicated task than most others.”
While 27 EU leaders convene before the chiefs of the 17 euro nations tomorrow, a meeting of the 27 EU finance ministers scheduled to precede those summits was canceled with no explanation.
The elements of the revamped blueprint may include expanding the reach of the 440 billion-euro ($611 billion) European Financial Stability Facility by turning it into a bond insurer and setting up vehicles to raise outside funds, possibly alongside the International Monetary Fund, and a bank-recapitalization strategy.
At an Oct. 23 summit, the leaders excluded a forced restructuring of Greek debt, sticking with the tactic of enticing bondholders to accept losses to help restore the country’s finances, and ruled out tapping the balance sheet of the European Central Bank.
Euro-area leaders are counting on the ECB to continue buying troubled countries’ bonds, three people familiar with the deliberations said. They are debating how to obtain an ECB signal without appearing to give orders to the politically independent central bank, said the people. The central bank has bought 169.5 billion euros in bonds so far.
In Berlin, lawmakers, who won a voice in this and future bailouts, debated the new strategy. German Chancellor Angela Merkel is likely to win, though the criticism underscores the political hurdles she faces.
“We’re all in new territory,” Merkel said today.
She was not alone in confronting bailout politics.
In Rome, Berlusconi’s Cabinet failed to agree on steps to spur growth last night amid opposition by the Northern League, his key ally, to a plan to raise the retirement age.
Italy’s debt totals more than $2 trillion, accounting for almost 120 percent of its gross domestic product. The ECB started buying Italian bonds two months ago to contain borrowing costs as yields surged.
In a statement before the talks, the premier defended his commitment to fiscal rigor, saying Italy is meeting its “public-debt obligations.”
During a summit in Brussels the day before, Berlusconi was pressed to cut pension spending in face-to-face talks with EU President Herman Van Rompuy and European Commission President Jose Barroso and then with Merkel and French President Nicolas Sarkozy.
“Confidence won’t result merely from a firewall,” Merkel said then. “Italy has great economic strength, but Italy does have a very high level of debt and that has to be reduced in a credible way in the years ahead.”