Italy and Spain block endorsement of 'growth pact' unless measures are introduced to soften terms on financial assistance
European leaders were deadlocked early on Friday over ambitions to embark on a "big leap forward" towards political union and rescuing the euro, with Italy and Spain engaging in a risky gamble to hold an EU summit hostage unless measures were agreed to lower the soaring costs of their borrowing.
The summit struggled to agree on milder bailout formulas that would relieve the pressure of the financial markets on Spain and Italy, but Mario Monti and Mariano Rajoy, the Italian and Spanish prime ministers, decided to block endorsement of an EU "growth pact" until it was clear whether the two-day summit would cough up financial aid.
All the evidence pointed to a bad-tempered summit. There were also rows about the location of a new European patents court, with Germany, France and Britain at odds over where the institution should be based.
With the fate of the currency said to be at stake, as well as a radical new blueprint for a federalised eurozone on the table, Europe's leaders appeared bogged down on relatively minor issues.
Leaders were more stridently at odds than ever before in the 30-month euro crisis. But with the stakes arguably at their highest since the currency and sovereign debt crisis erupted in Greece almost three years ago, the real substance of the summit was derailed, at least temporarily, by the Italian and Spanish hardball tactics, which were aimed at forcing Germany to soften its line on financial assistance to the weaker members of the eurozone.
Monti, who has been plaintively asking Germany to budge from its refusal to accept liability for others' debt, had been expected to deliver a plan late calling for help in reducing the cost of borrowing. Instead, he linked up with the Spanish to insist that he would not sign off on the growth pact until the overall outcome of the summit became clear on Friday, witnesses said.
The summit had been expected to quickly endorse the €120bn (£962bn) EU growth and jobs pact, more of a symbolic exercise in shifting the emphasis from austerity, involving little new money.
It was not clear if the Italian tactic would succeed. The growth pact has been pushed mainly by France and it is the troubled economies of the eurozone, such as Italy and Spain, who are keenest to promote it to try to turn the tide on the German emphasis on austerity and fiscal discipline.
German chancellor Angela Merkel appeared to have little to lose by seeing the meeting blocked and a summit failure.
Early on Friday the leaders finally got down to the main topic of the summit, grappling with a "road map" for a 10-year march towards a eurozone political federation, embracing pooled banking, debt and fiscal policies and powers.
But the leaders were also attempting to come up with immediate steps to help Italy and Spain. The Italian and Spanish tactics suggested that attempts to agree on short-term measures to shore up their public finances were not going well.
German officials maintained a tough line, insisting that there were instruments available to help, such as two eurozone bailout funds. But Italy would have to request aid and accept the same tough terms borne by others who had been rescued.
Monti had used the runup to the summit to warn of disaster if his pleas went unheard, while Rajoy had declared that Madrid's borrowing costs were at the brink of what was affordable, despite the benchmark 10-year yield falling below 7%.
Various options were being canvassed to help Italy and Spain while observing the German penchant for sticking to the rules governing the bailout funds and the role of the European Central Bank (ECB).
One option, said to have been mooted by the Germans, was to use the temporary bailout fund – the European Financial Stability Facility – to absorb excessive Italian and Spanish borrowing costs. Italy would be guaranteed an interest rate of, say, 4%. If the markets charged Italy more, the bailout fund would soak up the difference.
There is only €240bn left in the EFSF, unlikely to be enough to deal with Italy and Spain. More arcane schemes using the fund as an insurance instrument were being mooted, while other ideas included using the bailout funds to buy up Italian or Spanish bonds, or having the ECB act similarly in the secondary markets – since the bank is not allowed to finance eurozone governments directly.
Arguments flared over issues of seniority in the bailouts, with Spain seeking changes to the terms so that private creditors would not be subordinate to the bailout fund in debt repayments.
Despite signs that the leaders were seeking a short-term fix while wrangling over the longer-term masterplan for a eurozone political union, the deadlock did not augur well for a breakthrough later on Friday.
EU leaders appeared more divided than ever.
After talks on Wednesday between Angela Merkel, Germany's chancellor, and François Hollande, the French president, it was clear from the remarks of German officials that there was no meeting of minds; Paris and Berlin were seriously split at a summit for the first time in the crisis. "No sign of any warming between Berlin and Paris," said an EU official.
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