As Summit Looms, Merkel Sees 'Controversial' Talks

The Wall Street Journal

BRUSSELS—European leaders embark on talks here Thursday over steps they hope will begin to lift doubts about the survival of the euro, amid skepticism in financial markets that they can achieve a breakthrough to stem the debt and banking crises.

At the two-day summit, the leaders of Spain, Italy and France are expected to pitch ideas for easing the crisis that will be mostly deflected by German Chancellor Angela Merkel, whose country would finance most of them.

Some European Union leaders are urging decisive action: "I think it is very important that this [summit] rules out any doubt about the irreversibility of the euro," said José Manuel Barroso, head of the European Commission, the EU's executive arm.

The leaders will discuss how euro-zone economies can move toward tying their budgets and banking systems closer together based on a report put together by senior European Union officials. But markets aren't optimistic about major progress.

"The only element this week's summit could already decide is a European bank supervision, which could be regarded as a first step towards a banking union," said Carsten Brzeski, senior economist at ING in Brussels.

Ms. Merkel acknowledged in Berlin on Wednesday that the meeting could be a tough one for her. "I have no illusions. I expect controversial discussions in Brussels and once again all eyes, or at least many eyes, will be on Germany," Ms. Merkel told lawmakers in the Bundestag.

As she spoke, Spanish Prime Minister Mariano Rajoy had just told his own Parliament that Spain couldn't sustain super-high interest rates on its debts for much longer. The day before, Italian Prime Minister Mario Monti said he was prepared to stay in Brussels until Sunday if that's what it took to forge a credible solution to the euro zone's worsening troubles.

Ms. Merkel told the Bundestag that Germany wouldn't solve the euro zone's problems on its own, for instance by allowing the creation of joint euro bonds—backed by all 17 members of the currency union—that could lower Italian and Spanish funding costs, or other measures to provide a quick fix.

"I fear that at the summit, once again, there will be way too much talk of all kinds of ideas for joint liability and way too little about improved controls and structural measures," she said.

Ms. Merkel did leave some possible room for maneuver on banks, however, calling for a powerful European supervisor to oversee the Continent's biggest banks and saying that the first steps in that direction should be taken "very soon."

"The situation in Spain shows clearly how important it is to focus more on the banking sector and to lower the risk of contagion between banks and public finances," she said. A promise this monthearlier this month from the rest of the euro zone to lend Madrid as much as €100 billion ($125 billion) to support its banks hasn't stemmed rising interest rates.

But other leaders suggest there is no time to count on longer-term solutions.

French President François Hollande will push his counterpartsto allow the euro zone's bailout fund, the European Stability Mechanism, to directly prop up failing banks, rather than forcing governments to take on huge debts to bail out their lenders, a French official said Wednesday. Messrs. Rajoy and Monti, meanwhile, have asked for market intervention from the euro zone's rescue funds or the European Central Bank to lower yields on their government bonds.

"We can't finance ourselves at current prices for too long," Mr. Rajoy said. "There are many institutions and financial entities that have no market access. It's happening in Spain, it's happening in Italy and in other countries, that's why this is a crucial issue."

Angel Gurría, the secretary-general of the Organization for Economic Cooperation and Development, who has frequentlycriticized the euro zone's crisis strategy,also called for support from the ECB and other existinginstitutions, short of a full bailout. "Why go into dramatic alternatives simply because you're underutilizing the ones you already have?" he said in an interview with The Wall Street Journal.

Officials and analysts said Ms. Merkel is coming under more direct pressure at top-level meetings as the crisis gets worse and since the departure of former French President Nicolas Sarkozy, who had helped keep proposals strongly opposed by Berlin off the table at summits.

However, Mr. Hollande—whom Ms. Merkel met with Wednesday night—and Messrs. Rajoy and Monti clearly want a more wide-ranging discussion that Ms. Merkel will have to counter personally.

"The danger is that the Germans at some point get into a corner and say 'no,' and they [the leaders] don't come out with a compromise," says Janis Emmanouilidis, senior policy analyst at the European Policy Centre in Brussels. For this summit, however, he still expects leaders to avoid a direct clash and agree on some steps to address the crisis.

"There are signs from the top level of the German government—the chancellery and the finance ministry—that they are ready to go into the direction of some levels of banking union," namely limited funding for winding down failing banks in return for transferring oversight to a powerful supervisor, Mr. Emmanouilidis said. But he said joint European guarantees for bank deposits, which many analysts say are needed to restore confidence in debt-ridden countries, are probably a long way off.

— David Román and Jonathan House in Madrid, Matina Stevis in Brussels and Gabriele Parussini in Paris contributed to this article.

Write to Stephen Fidler at stephen.fidler@wsj.com