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European summit makes little progress on ways to deal with EU debt

Leaders of the deeply divided European Union met into the early hours of Friday in search of a common response to the continent’s growing economic crisis but were unable to bridge their differences.

Even a modest package intended to boost growth and employment was approved only in principle after Spain and Italy objected that the EU had not agreed to provide emergency relief for their troubled economies.

Markets in Europe and the United States fell Thursday amid low expectations that the leaders of Spain and Italy could convince German Chancellor Angela Merkel of the need for special measures to help stem the rapidly rising interest rates that have made it increasingly difficult for the two countries to borrow money to pay for the operation of their governments.

The discussion of steps to assist the two major European countries didn’t even begin until late Thursday, the European Council president, Herman van Rompuy of Belgium, told reporters. This was because the discussion of a $150 billion jobs and growth package, which four of the biggest European powers had agreed to in advance, ran hours longer than planned when Spain and Italy refused to give their final approval.

The meeting was cast in dire terms, with some commentators saying the future of the euro, used by 17 European countries, was at stake. If the leaders needed reminding of where previous European crises had led, Martin Schulz, the German president of the European Parliament, used the fact that Thursday was the 98th anniversary of the start of World War I to recall the “decades of hatred, war, genocide and the displacement of peoples” that followed.

People throughout Europe “are casting worried eyes towards Brussels, towards this summit meeting, because they fear that our European project is one step away from disaster.”

Calling for “quick and decisive action,” he also chided European leaders in circumventing the European Parliament, the sole representative of the citizens of Europe, as they planned reforms and changes.

Rompuy issued a report that proposed a banking union, introducing European-wide regulation of the continent’s troubled banks, a deposit insurance plan to head off runs on banks, as well as a fiscal union, which would introduce supervision at an all-European level of the budgets of governments that have use the euro as their currency.

The report also laid out a strategy for “mutualizing” individual nations’ debt, a step that both Spain and Italy have urged the EU to undertake in some form to prevent their countries from heading into a Greek-style default.

But Merkel has made clear that Germany would never agree to such an idea “as long as I am alive.”

On the eve of the summit, she reinforced the message.

“I emphatically reject that perspective contained in the report that puts priority on the mutualization (of debt),” she told the German Parliament. “Besides the fact that instruments such as euro bonds, euro bills, debt retirement funds and much more would not be constitutionally permissible in Germany, I also view them as economically wrong and counterproductive,” she said. She called instead for an emphasis on austerity and discipline rather than common liability.

Italian Prime Minister Mario Monti, a widely respected economist who this week won Italian parliamentary approval for a major labor reform package, has warned of the risks if the EU didn’t come to the rescue of countries that had pursued austerity and reforms as Germany had demanded, but whose economies are in the doldrums. Spanish Prime Minister Mariano Rajoy warned that Spain “cannot long finance itself” if it had to continue paying up to 7 percent interest to sell government bonds.

The impact of May’s election in France, which saw the ascent of Socialist Francois Hollande to the presidency, was also clear. Hollande, who replaced Merkel ally Nicolas Sarkozy, endorsed the Rompuy proposal.

The split between France and Germany, the two engines behind the European Union, is the most ominous development in the current crisis. The Frankfurter Allgemeine Zeitung, a conservative German paper, said in an editorial Thursday that an accord between the two countries was the “sine qua non” – the indispensable item – for resolving the current problems.

The newspaper also noted that money devoted to the growth and employment initiative was too small to spur growth in Europe, and in any case was just a reallocation of funds that had been earmarked for other purposes.

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