All eyes on expansion of European bailout

The financial world is today holding its breath as Europe's attempt to avoid a full-blown economic crisis reaches a crunch point.

After repeatedly failing to address debt woes, European leaders will gather in Brussels to finalise a ''comprehensive strategy'' for containing the crisis.

Markets are desperately hoping the 17 leaders of euro-zone nations can put their squabbling to one side, amid a damaging plunge in confidence that threatens to derail the global economy.

Investors want the leaders to announce a deal between Greece and its bankers and to expand the region's €440 billion bailout fund so it can handle far more distressed debt.

But success is far from certain and the stakes could hardly be higher. Failure to reach a credible agreement is likely to spark further volatility on markets, and could ultimately threaten the future of the euro zone.

A sudden turn for the worse in Europe also threatens economies in Australia's region.

The Minister for Foreign Affairs, Kevin Rudd, yesterday said the crisis had reached a ''critical stage'', and any fallout could have ''major global repercussions from which few economies would be immune''.

''What Europe does now affects not just its 27 member states. It affects all 193 member states of the global economy,'' Mr Rudd said in Perth.

''And it affects us in the Asia-Pacific region, where continued economic growth and stability go hand in hand.''

Earlier this week, the French President, Nicolas Sarkozy, reportedly told the British Prime Minister, David Cameron: ''We're sick of you criticising us and telling us what to do.''

Mr Sarkozy and Germany's Chancellor, Angela Merkel, have also attacked the Italian Prime Minister, Silvio Berlusconi, over his efforts to get debt under control.

Amid these tensions, the deputy governor of the Reserve Bank, Ric Battellino, yesterday said the situation in Europe was ''particularly disturbing''.

It had helped lower world economic growth this year, taking the edge off inflation, he said.

In a sign the slowdown could result in a Melbourne Cup day rate cut, Mr Battellino said there was ''scope for monetary policy to be supportive of economic activity, if needed''.

But although many households would welcome a rate cut, the consequences of a severe crisis in Europe could overshadow the ''good news'' of lower rates.

The chief currency strategist at Westpac, Robert Rennie, said failure to reassure financial markets would almost certainly plunge Europe into recession, with ''very uncomfortable'' consequences for the world economy.


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