ROME – The leaders of France, Germany, Italy and Spain have agreed to push for a growth package worth up to $163 billion at a European Union summit next week that’s intended to kick-start the economy and safeguard 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 details beyond agreement on pursuing a financial transaction tax – something Germany has championed.
Economists said the size of the growth package would be modest, about 1 percent of the euro alliance’s gross domestic product. But they said it marked a recognition by Merkel that more government spending would be needed.
“It is at least a step in the right direction,” said Ted Truman, a former international economics advisor at the Federal Reserve and at the Treasury Department in the Obama administration. “The tone has changed, in part because the German economy has not been doing as well recently.”
Merkel has come under rising pressure to give ground on key pro-growth measures.
“We say that growth and solid financials are two sides of a coin,” she said. “Solid financials are not sufficient.”
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.
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 euro 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.
Yet it’s hardly a long-term answer to the crisis.
“We still have miles to go before we get to any meaningful solutions to Europe’s problems,” said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.
A major challenge, Sohn noted, is how to strengthen Europe’s banking system.
The European Central Bank said Friday that it will make it easier for banks to receive its loans by accepting more kinds of securities as collateral. The shift could support Spain’s hard-pressed lenders, though it means more risk for the ECB’s own finances.
Europe’s banks will have greater access to ready cash amid the turmoil of the region’s debt crisis. The ECB has been offering unlimited loans at its 7-day, one-month and three-month credit offerings to steady the banking system. But banks must have something they can put up as collateral.
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 on 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 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 on 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.