EU summit: Merkel challenged on growth strategy

German Chancellor Angela Merkel and French President Francois Hollande in Brussels, 23 May 2012 Mr Hollande is pressing Germany to do more to ease the eurozone's debt burden

EU leaders are continuing summit talks in Brussels with Germany resisting pressure to launch eurobonds as a way to ease the eurozone crisis.

Germany's Chancellor Angela Merkel said the bonds, pooling eurozone debt, would violate EU treaties and would "not contribute to kick-starting growth".

France's President Francois Hollande says he wants discussion of eurobonds - and the Irish PM Enda Kenny said the idea would be on the table.

The summit is focusing on growth.

European stock markets fell about 2% amid anxiety that Greece might have to exit the euro. The eurozone is said to be preparing for such a scenario.

Ms Merkel said Wednesday's informal talks would not result in decisions, but would influence formal summit talks in late June.

The leaders would look at ways to deepen the EU internal market, boost mobility in Europe's labour market and better target European Investment Bank funding for projects. Such measures could help stimulate growth, she said.

It is the first opportunity for President Hollande to shift the emphasis from austerity to growth - a key message he gave to French voters, who elected him on 6 May. The Socialist leader's victory is seen as a challenge to the prevailing austerity drive in the EU.

Greece looms large

Speaking on arrival, UK Prime Minister David Cameron urged the EU to tackle the deep problems in the eurozone.

"If we are not going to keep coming back and back to meetings like this, we also need to deal with some of the longer term issues at the heart of a successful single currency," he said.

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The menu might have changed but the agenda has not: to fix a crisis threatening the future of the euro and the world economy”

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During talks on Monday among the 17-nation Eurogroup each eurozone country was told to "prepare a contingency plan, individually, for the potential consequences of a Greek exit from the euro", an official close to the talks told Reuters news agency.

Even though that prospect is not formally on the agenda, correspondents say it is sure to be discussed.

Monday's discussions about planning for a possible Greek exit were informal, an EU official told the BBC's Europe editor Gavin Hewitt.

The European Commission faces a dilemma: if it does not draw up such plans it is branded as irresponsible, but if it does it is seen as paving the way for what it wants to avoid most, the official said.

The Organisation for Economic Co-operation and Development (OECD) has warned that the eurozone could slip into "severe recession".

The informal dinner in Brussels on Wednesday evening will be chaired by the European Council President, Herman Van Rompuy.

He has asked leaders to raise "innovative, even controversial, ideas" to stimulate growth, that could lead to decisions at the June EU summit.

Debt instability

Mr Hollande said on Wednesday: "The top priority is injecting liquidity into the European financial system to ensure that European banks, all European banks, can be consolidated."

He was speaking after a meeting with Mariano Rajoy, the prime minister of Spain, whose banks are under severe pressure.

Mr Rajoy denied the banks would need bailout funds, but said the high rates of interest Spain was having to pay were unsustainable.

Both Mr Hollande and Mr Rajoy said it was vital that Greece remained in the euro.

Breaking a recent tradition, Mr Hollande did not hold a pre-summit meeting with Ms Merkel.

He and other leaders may push for a delay to deficit reduction targets, which they believe are strangling growth.

With eurobonds countries could issue debt guaranteed jointly by eurozone members - that would cut the high borrowing costs faced by countries like Spain and Italy and encourage markets to lend to them.

Germany sold sovereign bonds at zero interest on Wednesday, reflecting its "safe haven" status for investors, while Spain and some other countries face rates as high as 6% for their bonds. That divergence threatens the very existence of the EU, European Parliament President Martin Schulz warned.

The eurobond idea is backed by several countries as well as the European Commission.

However, Ms Merkel has the support of the Netherlands and Austria in opposing eurobonds.

Investment ambitions

The BBC's Gavin Hewitt says there is more likely to be consensus on other measures to promote growth.

They are expected to include making better use of the EU's "structural funds" - a large pot of money meant to support infrastructure projects in the EU's poorer countries, and much of which is unallocated.

Ahead of the summit the European Commission announced an allocation of 230m euros (£185m; $290m) from the EU budget for "project bonds", aimed at speeding up investment in Europe's energy, transport and digital networks.

The initiative could trigger more than 4bn euros of private investment, the Commission says.

There is also talk of giving the European Investment Bank a 10bn-euro capital boost to help small businesses.

Our editor says the problem with these ideas is that their impact will come in the long term.

As for Greece, he says the message is likely to remain the same - that Athens must accept the terms of the bailout deal, including austerity measures.

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