Europe's mood remains positive despite splits over crisis (Feature)

By Andrew McCathie Dec 14, 2010, 16:50 GMT

Berlin - The divisions between European leaders on how to combat the region's debt crisis have so far failed to shake the assured mood prevailing in the continent's leading economies.

While European Union leaders prepare for a crucial meeting this week to consider measures to deal with the debt crisis gripping parts of the 16-member eurozone, German investor confidence posted its second consecutive monthly gain in December, a survey released Tuesday showed.

The ZEW institute's investor confidence survey is also likely to set the stage for the release this week of a clutch of key European economic sentiment surveys, which should underscore the impact of the debt crisis on the mood in Europe.

This includes surveys showing business confidence nudging up in December in the eurozone's two biggest economies - Germany and France.

But Ben May, European economist with the research group Capital Economics, believes that there is no silver bullet to solve the currency bloc's problems.

'Policymakers could do more to reassure markets, reduce peripheral governments' borrowing costs and boost demand in the region as a whole,' he said.

Ahead of the EU summit starting in Brussels on Thursday, the European Central Bank (ECB) chief Jean-Claude Trichet called on the leaders to boost the funds available under the European Financial Stability Facility (EFSF) and to ensure the eurozone bailout mechanism had maximum flexibility.

'On the EFSF, I can say we are calling for maximum flexibility and I would say maximum capacity quantitatively and qualitatively,' Trichet told the International Business Journalists' Club in Frankfurt on Monday night.

This could include the temporary 440-billion-euro EFSF buying government bonds as part of an effort to peg back the borrowing costs of high deficit-and-debt eurozone states such as Portugal and Spain.

But both the French and German governments have already expressed their opposition to increasing funds for the rescue mechanism.

In his comments this week, Trichet also echoed suggestions that a key step on containing the debt crisis that has already engulfed Greece and Ireland would be to step up European economic integration through increased fiscal coordination across the region.

'The eurozone is not ready to stomach a sovereign debt default at this moment, but at the same time, appetite for more stopgap measures also look small,' said ING Bank economists in a note to clients.

'That would put the full weight of the sovereign debt crisis management on the ECB,' they wrote.

Indeed, up until now, the ECB has appeared to be doing the heavy lifting in shoring up the eurozone and its weak member states.

Meanwhile, Europe's political leaders have struggled to find common ground on how to deal with the crisis that has triggered financial market turmoil and threatened the region's recovery from recession.

The ECB last week stepped up its government bond purchases, splurging a total of 2.67 billion euros (3.56 billion dollars) in a bid to ease market tensions unleashed by the eurozone's debt crisis.

This has helped to stabilize the euro at about 1.34 dollars after the emergence of the debt crisis at the start of the year took the common currency on a roller coaster ride amid worries about the future of the eurozone.

EU leaders are likely to use the summit to launch another strong defence of the common currency, with a senior Berlin source insisting Tuesday: 'The euro does not stand before the abyss.'

At the same time, the Frankfurt-based ECB has said it planned to extend its emergency support for the banking sector well into next year.

But Trichet also joined Chancellor Angela Merkel's government in Berlin in resisting calls for the EU leaders to take further action to head off by the crisis, including launching a common European bond. This would give financially strapped eurozone states access to cheaper money.

Berlin fears the introduction of a so-called E-bond would result in Germany carrying the debt burdens of the weaker eurozone members and be forced to pay higher market interest rates.

In the meantime, Berlin officials have indicated that Germany was prepared to consider favourably any request from the ECB to boost its capital as it deals with the growing costs of battling the debt crisis.

One key item on the Brussels summit agenda is expected steps to forge a permanent rescue mechanism for debt-troubled eurozone states after the current system expires in 2013. At the heart of the present mechanism is the EFSF.

Ultimately this could include private investors being forced to help carry the burden of any bailout launched to keep any eurozone states from defaulting on their debt.