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Germany vs. Italy: At eurozone meeting, the battle is over urgent action

As Europe's leaders meet in Brussels today, Germany is pushing hard for long-term reform. But Italy PM Monti says Europe faces disaster if high borrowing costs aren't addressed quickly.

By Staff writer / June 28, 2012

German Chancellor Angela Merkel speaks to the media as she arrives for a two-day European Union leaders summit in Brussels June 28.

Eric Vidal/REUTERS

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Paris

With Italy and Spain in acute crisis, Europe’s leaders convene in Brussels today for a summit that appears heavy on long-term reform, but scarce on short-term measures to quickly staunch the crisis.

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Like 19 other summits since 2010, the two-day event is forecast as a “moment” in European history designed to show solidarity, contain the fear of spreading debt, and reassure markets as a crisis that started with Greece now threatens Italy and Spain, the third- and fourth-largest European economies. While expectations of the summit are low, analysts say that the key issue for for markets is the appearance of clear decisions, even if they are designed for the long term.

EU leaders will discuss a new “road map” for closer integration, including establishing a European finance minister, a banking union, shared fiscal sovereignty, and the possibility of allowing Europe's central bank to be a “lender of last resort,” not unlike the Federal Reserve in Washington. The most contested plans are over ceding national fiscal powers to Brussels, and whether to share debt liability and the cost of the crisis across the eurozone.

Germany’s Angela Merkel said this week that she will noy agree to common debt in Europe “as long as I live.”

Italy’s appointed prime minister, Mario Monti, who just passed a crucial labor-law reform, sent a salvo back, saying Europe faces disaster if it can’t stop high debt costs that are sinking his economy and appear to be the result of EU delay and foot-dragging.

Mr. Monti said angry “political forces” in Italy and elsewhere could win the day. Local sentiment, he told reporters in Brussels ahead of the summit, is: “Let European integration, let the euro, let this or that large country" rot.

Italy’s current benchmark 10-year bond costs are 6.3 percent; Spain’s costs are at 7 percent, considered unsustainable.

“The big problem at the meeting in Brussels is Italy,” says François Heisbourg of the Foundation for Strategic Studies in Paris. “Monti is drowning and Brussels and Berlin are not helping him. If Italy goes under, any agreements won’t matter.”

In January, at its most recent “summit to end all summits,” the EU agreed to closer fiscal union; at the same time, the European Central Bank quietly loaned out some $1 trillion to more than 800 European banks in what was seen as “quantitative easing,” EU-style.

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