As Germany raised fresh objections to the proposed rescue deal for indebted eurozone countries, the International Monetary Fund signalled it was considering stepping in - a move that could lead to British taxpayers paying to support the single currency.
Amid mounting Coalition tensions over Europe between the Conservatives and Liberal Democrats, David Cameron will today travel to Brussels, where European Union leaders have promised to hammer out a deal to resolve Europe’s debt crisis.
But officials admitted last night that many of the details of any deal will not be resolved tonight and will have to wait for another meeting of EUfinance ministers at the weekend.
The gloomy outlook worried financial markets. The FTSE 100 index closed down at 5525, and shares in Germany, France and the US all fell.
The single currency rescue effort was left hanging in the balance last night as Germany and Italy both challenged aspects of the likely deal.
EU leaders have said a summit tonight will outline plans to cut Greece’s crippling debt burden and expand a bail-out fund meant to support larger EU economies such as Italy and Spain.
Yet leaders last night appeared to be little closer to settling their long-standing differences on those issues.
The biggest row centres on the role of the European Central Bank in bailing out struggling eurozone economies.
A draft agreement circulated among leaders yesterday suggested that the ECB should go on buying the bonds of troubled members, effectively lending money to them directly.
The ECB’s bond-buying programme is unpopular in Germany, where critics fear it will compromise the central bank’s independence and its ability to control inflation.
Angela Merkel, the German chancellor who is facing fierce domestic opposition to the rescue deal, yesterday publicly rejected the draft as “not acceptable to Germany”.
The German parliament will today vote on a motion that would tell the ECB to stop its bond-buying programme.
Meanwhile, there were fears that the Italian government of Silvio Berlusconi could collapse over a dispute about austerity measures demanded by other EU governments.
In exchange for supporting Italy’s bonds, the EU has told Italy to increase its retirement age.
The Northern League, Mr Berlusconi’s junior coalition partners, oppose the plan. The party’s leader, Umberto Bossi, yesterday suggested the government could fall over issue and said he was “pessimistic” about its survival.
In Brussels, the European Commission insisted that Mr Berlusconi must do more to balance his country’s budget. Italy still needs to back up Mr Berlusconi’s promises with “specific actions” taken with “clear timing,” the commission said.
The summit tonight is also intended to agree on ways to boost the financial power of bail-out funds meant to underwrite governments in Italy and Spain if they struggle to raise money on international markets. One option is a Special Investment Vehicle, a fund that raises money from investors including wealthy governments and the IMF.
Eurozone attempts to cut the Greek debt burden also appeared to be making little progress, though the Greek government expressed hopes that the summit will announce that bond-holders will lose 50 per cent of their stakes.
Sir Mervyn King, the Governor of the Bank of England, suggested the EU leaders’ emergency measures can buy time but cannot resolve the fundamental threats to European economic stability.
The telegraph
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