EVERY phrase that German Chancellor Angela Merkel and French President Nicolas Sarkozy utter as they unveil proposals to reform the euro zone will be dissected for hints of what many want: plans to intervene quickly, and on a massive scale, to stop Europe's financial crisis. But few inside Germany expect them to come.
Dr Merkel, widely seen as the woman in charge of Europe's future, has repeatedly ruled out dramatic, speedy fixes. But if the French-German proposals in Paris have not produced just that, they could disappoint investors who have been banking on a solution, potentially making the crisis even worse. Many euro zone officials have said that whatever leaders agree on at a summit at the end of the week will make or break the continent's finances.
Talks in Paris overnight were expected to set the scene for a week of meetings involving Europe's leaders, the European Central Bank and US Treasury Secretary Timothy Geithner. On Friday, an EU summit will convene in Brussels.
Sceptical Germans see a pattern, as hopes for comprehensive solutions have built before one high-profile meeting after another this year, only to crash back to earth when leaders yet again fail to halt the crisis.
"This summit will be just another big disappointment for those who expect something big," said Clemens Fuest, an economist at Oxford University who is an adviser to the German Finance Ministry. "Ahead of the summit, we see the usual process. Expectations are very high, and then Merkel comes in with her expectations management."
In a much-anticipated speech in Germany's parliament last week, Dr Merkel said little that she had not said before. She called for treaty changes that would make the rest of the euro zone behave more like Germany, and compared Europe's work to a marathon, not a sprint.
But German officials acknowledged privately that despite the focus on long-term fixes, they will need to take short-term measures to calm markets and help troubled countries such as Italy and Spain with their borrowing costs, which have spiked to euro-era records in recent weeks.
On Sunday, Italy's Prime Minister Mario Monti unveiled a radical and ambitious package of spending cuts and tax increases, including deeply unpopular moves like raising the country's retirement age.
The measures are meant to slash the cost of government, combat tax evasion and step up economic growth, so the country can eliminate its budget deficit by 2013. Mr Monti took the steps in an emergency decree, which means they will take effect before he presents them to parliament for formal approval.
In Ireland, the Prime Minister Enda Kenny used a live televised address to the nation to prepare the way for one of the most austere budgets in the republic's history. Public spending will be cut by ?2.2 billion ($2.8 billion) a year and taxes raised ?1.5 billion, with value-added tax increasing to 23 per cent.
As Europe plays catch-up and the tone inside Dr Merkel's office remains dead-set against the fastest ways to cap the crisis, a growing number of critics are complaining that she and Mr Sarkozy are not moving quickly enough.
"These days, Europe needs one more treaty a lot less than immediate steps," said Francois Hollande, the Socialist Party candidate for French president. "I recall the experience of the European constitution treaty: months and months of negotiations, then ratifications, only to be rejected. We cannot wait."
Frequently Asked Questions about this Article…
What did the Merkel‑Sarkozy proposals aim to do about the euro crisis?
The proposals unveiled by German Chancellor Angela Merkel and French President Nicolas Sarkozy were aimed at reforming the euro zone — focusing on treaty changes and longer‑term fixes rather than dramatic, immediate interventions. The article notes Merkel has repeatedly ruled out quick, sweeping solutions and described the work as a marathon, not a sprint.
Should investors expect a quick fix to the euro crisis after the Paris talks?
Few inside Germany expect a fast fix. The article says Merkel has ruled out dramatic speedy fixes and many Germans are sceptical that high‑profile meetings will deliver a comprehensive solution. Investors banking on an immediate solution risk disappointment, which could worsen market stress.
How important is the EU summit in Brussels for markets and investors?
Very important — according to the article, euro zone officials say whatever leaders agree at the Brussels summit could make or break the continent’s finances. Expectations are high going into the summit, so its outcome could have a material impact on investor sentiment and markets.
What short‑term market‑calming steps are being discussed for the euro zone?
While the public focus is on long‑term treaty changes, the article reports German officials privately acknowledged the need for short‑term measures to calm markets and help countries such as Italy and Spain with sharply higher borrowing costs. The Paris talks also involved the ECB and US Treasury Secretary Timothy Geithner as part of broader discussions.
What austerity and reform measures did Italy’s Prime Minister Mario Monti announce?
Mario Monti unveiled a radical package of spending cuts and tax increases, including raising the retirement age. The measures are intended to cut government costs, fight tax evasion and boost growth so Italy can eliminate its budget deficit by 2013. Monti used an emergency decree so the measures take effect before formal parliamentary approval.
What budget measures did Ireland announce and how could they affect the economy?
Ireland’s Prime Minister Enda Kenny prepared one of the republic’s most austere budgets: public spending will be cut by €2.2 billion a year and taxes raised by €1.5 billion, with value‑added tax increasing to 23%. The article presents these measures as tough fiscal steps aimed at stabilising the country’s finances.
How have borrowing costs for countries like Italy and Spain been behaving during the crisis?
The article notes borrowing costs for troubled countries such as Italy and Spain have spiked to euro‑era records in recent weeks. That rise in bond yields is part of the reason officials say short‑term measures may be needed to calm markets.
What signals should everyday investors watch next in the euro crisis story?
Based on the article, investors should watch the outcomes of the Paris talks and the EU summit in Brussels, statements from Merkel and Sarkozy, any short‑term measures announced to calm markets, ECB involvement and comments from US Treasury Secretary Timothy Geithner, and fiscal developments in Italy and Ireland. These events and announcements are likely to influence market sentiment and sovereign borrowing costs.
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