Disagreement over how to fight Europe's debt crisis deepened on the eve of a two-day summit of European leaders, as violent protests and uncertainty fueled investors' concerns once again.
Amid the political deadlock, the crisis' effects rang out across the region. Rioters in Athens on Wednesday smashed cars and hurled gasoline bombs at police during a nationwide protest and general strike against the government's latest austerity measures and steps to weaken union bargaining power.
Rating agency Moody's meanwhile warned it may downgrade the debt of Spain, the eurozone country many economists say is too big to be bailed out the way smaller Ireland and Greece have been. Still, diplomats said the meeting of European Union heads of state and government Thursday and Friday would not result in any new shock-and-awe decisions to contain the smoldering debt crisis. Instead it will focus on a small change to EU treaties to set up a new crisis mechanism agreed almost two months ago.
But the pressure on European policymakers to find a way out of the debt crisis remains high. Many economists warn that weak growth, paired with worries over the health of the banks, has made the debt loads of countries like Greece, Portugal and Ireland unsustainable. Concern that they won't pay back their creditors has rocked bond markets and pulled down the value of the euro.
Calls for bolder actions, either increasing the eurozone's euro750 billion ($1 trillion) bailout fund or creating pan-European bonds to boost confidence in the euro, were nevertheless growing louder. German Chancellor Angela Merkel so far the most ardent opponent of both proposals, was attacked by the country's biggest opposition party for her inertia.
In an opinion piece in the Financial Times, the parliamentary leader of the Social Democrats, Frank-Walter Steinmeier, and Peer Steinbrueck, Germany's former finance minister, said a "more radical, targeted effort to end the current uncertainty" was necessary.
They called for a partial restructuring of the debts of Greece, Ireland and Portugal, guarantees for the bonds of stable countries, and the limited introduction of pan-European bonds. But even Social Democrat leaders were doubtful that the Eurobond proposal would get a hearing at the summit. "My expectations are not great," Sigmar Gabriel, the head of the party, said in a statement. "Both Merkel and Sarkozy seem allergic to any sense of strategic vision."
Meanwhile, EU officials indicated that an increase in the bailout fund would not be ruled out.
The EU's Monetary Affairs Chief Olli Rehn, speaking in Strasbourg, said it was a priority to make the current bailout fund "more agile and effective."
His comments echoed an earlier statement from European Central Bank President Jean-Claude Trichet. "On the EFSF I can say we are calling for maximum flexibility and I would say maximum capacity quantitatively and qualitatively," Trichet told journalists Monday night.
Ratings agency Moody's on Wednesday warned it may downgrade Spain's debt because the government is vulnerable to a borrowing crunch next year, when the recapitalization of weak banks could prove more costly than expected for public finances. The agency, which lowered Spain's rating from Aaa to Aa1 in September, said it will review the rating again because of high borrowing needs in 2011. However, it said that it does not expect the country to need a bailout.
Moody's warning comes a day after Spain had to pay significantly higher interest rates when it sold euro2.5 billion ($3.3 billion) in treasury bills to help refinance its debt load.
In Greece, the seventh general strike of the year protesting painful austerity measures imposed as part of its euro110 billion bailout, grounded flights, closed factories, and disrupted hospital and transport services.
Protests in Athens escalated, as youths wearing black masks and ski goggles used sledgehammers to smash paving stones and hurled the rubble at police. A central post office near parliament briefly caught fire as employees and bystanders ran for safety. At least five people were injured during the protests in Athens and Greece's second largest city Thessaloniki. The chaotic clashes were among the worst since the start of Greece's financial crisis. In May, three people died in a bank torched by rioters. Late Tuesday, the Greek government won a key vote in parliament on new labor reforms that include deeper pay cuts, salary caps and involuntary staff transfers at state companies.
The measures are aimed at improving the competitiveness of the Greek economy, one of the EU's key demands but they also reduces unions' collective bargaining power in the private sector, allowing employers to substantially cut salaries.
The Greek strike action was supported by several hundred members of the European Trade Union Confederation, who gathered in front of the European Commission headquarters in Brussels. They demanded that EU leaders focus on spurring economic growth rather than imposing further budget cuts.
The march was timed to send a message to the government before the EU summit, and deliver a show of solidarity for workers across the continent. "The austerity is already being felt," said Christian Dreyer, who heads the railway unit of a French union. "The austerity plan for Europe is going to accentuate the social malaise across all of Europe.
Portugal's government, meanwhile, was expected to unveil further reforms designed to prevent the country from having to follow Greece and Ireland in seeking an international bailout.
Prime Minister Jose Socrates has held talks in recent days with trade unions and business leaders as his Socialist government searches for ways of spurring economic growth despite potentially crippling austerity measures designed to cut sovereign debt. The government was expected to announce its latest reforms after a weekly Cabinet meeting Wednesday.
Portugal's high debt and low growth have made it one of the weakest members of the 16-nation eurozone, but the government insists it doesn't need or want a financial rescue of the kind provided to Greece and Ireland.
Ciaran Giles in Madrid, Barry Hatton in Lisbon, Crystal Becerril in Paris, and Derek Gatopoulos in Athens contributed to this report.