European Union leaders piled pressure on Italy on Sunday to speed up economic reforms to avoid a Greece-style meltdown as they began a crucial two-leg summit called to rescue the euro zone from a deepening sovereign debt crisis.
The aim is to agree by Wednesday on reducing Greece’s debt burden, strengthening European banks, improving economic governance in the euro area and maximising the firepower of the EFSF rescue fund to prevent contagion engulfing bigger states.
The euro zone’s two main powers, Germany and France, remain at odds over whether to draw the ECB deeper into crisis fighting, officials said.
A document prepared by finance ministers for the 27 EU leaders outlined possible guarantee schemes to help banks secure access to wholesale funding at a time when many are shut out of inter-bank lending.
Before the 27 leaders began work on a comprehensive plan to stem the crisis, German Chancellor Angela Merkel and French President Nicolas Sarkozy held a private meeting with Italian Prime Minister Silvio Berlusconi, officials said.
Diplomats said they wanted to maximise pressure on Rome to implement structural labour market and pension reforms to boost Italy’s economic growth potential and reassure investors worried about its huge debt ratio, second only to Greece’s.
A German government source said Merkel and Sarkozy underlined “the urgent necessity of credible and concrete reform steps in euro area states,” without which any collective EU measures would be insufficient.
Merkel warned in a speech on Saturday that if Italy’s debt remained at 120% of gross domestic product “then it won’t matter how high the protective wall is because it won’t help win back the markets’ confidence.”
European Council President Herman Van Rompuy, chairing the summit, painted a sombre picture of the economic challenges facing Europe in his opening remarks. “Our meetings of today and Wednesday are important steps, perhaps the most important ones in the series to overcome the financial crisis, even if further steps will be needed,” he said.
Finance ministers made progress at preparatory sessions on Friday and Saturday, agreeing to release an €8 billion lifeline loan for Greece and to seek a far bigger write-down on Greek debt by private bondholders.