PREVIEW: Euro crisis set to steal show at EU "jobs and growth" summit

By Alexandra Mayer-Hohdahl Jan 28, 2012, 2:01 GMT

Brussels - After more than two years of ineffective battles against the eurozone debt crisis, the European Union had pledged that its summit Monday would no longer focus on austerity alone, but on growth and jobs too.

In the run-up to the meeting, however, the EU's inability to deal with the budget problems of its weakest members continued to hog the limelight, with fears of a Greek default reignited by drawn-out talks over a writedown on Athens' privately held debt.

Speaking at the World Economic Forum in Davos, Switzerland, German Finance Minister Wolfgang Schaeuble on Friday rejected speculation about Athens going bankrupt.

'Many market players say that, but I absolutely do not expect it. We will prevent a default. But for that, the private sector must recognize its responsibilities,' he said.

Portugal, another past bailout recipient, was also creating fresh jitters with its bond yields soaring to record heights amid fears that it, like Greece, would soon need fresh rescue money.

'The crisis has been going from bad to worse, as Europe's policymakers seem boundlessly capable of making a mess out of the situation,' Daniel Gros, the director of the Brussels-based Centre for European Policy Studies think-tank, recently wrote.

'Great empires rarely succumb to outside attacks. But they often crumble under the weight of internal dissent,' he added. 'This vulnerability seems to apply to the eurozone.'

On Friday evening, the ratings agency Fitch downgraded the credit ratings of five eurozone countries, including Italy and Spain. Italy was downgraded from A+ to A- and Spain from A to AA-, citing financing and monetary problems facing members of the single currency bloc. Belgium, Slovenia and Cyprus were also downgraded.

This week, International Monetary Fund chief Christine Lagarde advised the currency bloc to boost the size of its bailout funds - capped at 500 billion euros (657 billion dollars) - to shield the likes of Italy and Spain from market pressure.

But instead Monday's summit is expected to approve the fiscal compact, a new treaty due to introduce balanced budget requirements, policed by the EU Court of Justice, and voting changes to make it easier to sanction countries that breach deficit targets.

The pact has been relentlessly pushed by Germany, which some politicians have suggested may soften its opposition to expanding the eurozone bailout resources once tougher eurozone discipline rules are enforced.

At stake is the creation of a 750-billion-euro rescue fund, by adding the 500-billion-euro European Stability Mechanism, due to be launched in July, to the 250 million euros left in its predecessor, the European Financial Stability Facility (EFSF).

But France's EU Affairs Minister Jean Leonetti said there was 'no question' of Monday's EU summit agreeing to the proposal, which has instead been relegated to the agenda of a following leaders' meeting on March 1-2.

With a looming recession and unemployment hovering around the 10-per-cent mark, EU leaders are also under pressure to deliver results on the growth and jobs front.

'The youth unemployment situation is reaching crisis point,' European Commission President Jose Manuel Barroso warned this week, speaking of the whole EU.

A four-page draft summit statement contains pledges to redirect EU regional funds towards fighting youth unemployment and to support small and medium-sized enterprises, also through fresh loans from the European Investment Bank.

The EU commission said Friday up to 82 billion euros in EU funding could be reprioritized.

The draft also mentions commitments to end a row holding up the launch of a single EU patent system and urgings to bank supervisors to watch out against risks of a credit crunch.

Like Germany, the European Central Bank has often been urged to do more to more to put out the debt crisis - in its case, by buying more bonds of troubled eurozone members.

But in Davos, ECB President Mario Draghi hinted that he was not prepared to put the likes of Italy, Spain or Portugal out of their misery, warning that risk premiums of European crisis countries were due to remain high for a longer period to come.

He is due, however, to be thanked by EU leaders for the decision to provide unlimited loans to private banks, which has partly allayed credit crunch fears and helped revive demand for government bonds. The ECB measures 'help very much,' the EU summit draft reads.

Monday's talks are to take place against the backdrop of social unrest.

The European Trade Union Confederation has called for a day of action on Sunday to protest against an austerity-focused approach in the fiscal compact, which should instead include a 'strong social component.'

Brussels is set to be paralyzed by a general strike on Monday, with Belgian workers set to protest their government's austerity measures. With airports and train stations shut, leaders were due to use a military airport to fly into the city.