European leaders pivot back to debt crisis after wake-up call

European leaders jolted by the sudden return of debt-crisis turmoil will gather for talks in Brussels this week as they attempt to restore investor confidence in the euro area.

After a week when European stocks went into meltdown, leaders including German Chancellor Angela Merkel and French President Francois Hollande will meet for a two-day summit beginning Oct. 23 with the region’s economy back on the agenda.

“It’s a wake-up call to the entire euro-zone leadership that the strategy that they have been following, with a strong fixation on the fiscal deficit targets, is not working,” Charles Dallara, the former chief of the Institute of International Finance, said in an interview Oct. 17.

The EU’s 28 leaders prepare to meet as echoes of the crisis that emerged in Greece in late 2009 reverberate around them, with a slump in government bonds in peripheral countries and a global stock-market decline of more than $3 trillion so far this month. The economy of the 18-nation euro area stagnated in the second quarter and inflation, at 0.3 percent last month, isn’t seen returning to the European Central Bank’s target of just under 2 percent before 2017.

Lingering Crisis

As the lingering crisis again exposes flaws in the euro’s construction and market turbulence signals the bloc isn’t out of the woods yet, France and Italy are still trying to loosen the fiscal settlement that helped hold the currency together in 2012. French Finance Minister Michel Sapin and Economy Minister Emmanuel Macron are due to hold talks with their German counterparts in Berlin today ahead of the summit.

“There are always times when data and policy making coincide, and the markets are interested in what’s happening,” said Anatoli Annenkov, senior economist at Societe Generale in London. “The euro crisis is a long-term crisis, and the long- term solutions are boiling back to what we do in terms of structural reform.”

While the economy won’t dominate the EU agenda in the same way as it did during multiple crisis meetings from 2010 to 2013, there is recognition that the euro-area’s woes are returning to center stage, a senior EU diplomat said.

Leaders will also discuss energy policy, including a natural gas dispute with Russia over the conflict in Ukraine, and the growing threat from the Ebola virus.

Manufacturing Decline

The summit will begin with a reminder of the state of the region’s economy. Euro-area services and manufacturing growth probably declined for a third month in October, with the manufacturing segment probably slipping below the 50 mark that separates growth from contraction for the first time since mid-2013, according to the median estimate of 35 economists in a Bloomberg News survey. The surveys of purchasing managers by London-based Markit Economics will be released on Oct. 23.

A fall in European stocks for eight straight days last week, the longest rout since 2003, came as a selloff in Greek securities triggered a schism in sovereign debt, with benchmark yields in the so-called core, including Germany and France, tumbling to record lows as investors sought the safest assets.

“It’s hard for Italy and France to stick with the rules of the new stability pact, which in principle require an annual structural adaption of 0.5 percentage points,” said Thomas Harjes, senior European economist at Barclays Plc in Frankfurt. “The political discussion is difficult.”

Commission Statement

In an echo of the worst days of the crisis, the European Commission was forced into publishing a statement on Oct. 16 as Greek sovereign bonds slumped on market jitters over Premier Antonis Samaras’s plan to sever the 240 billion-euro ($306 billion) lifeline that has kept the country afloat since 2010.

In the middle of last week, the Greek 10-year yield increased the most since July 2012. By Friday, yields dropped 90 basis points to 8.07 percent. While that’s up from 5.52 percent on Sept. 8 — the lowest since early 2010 — the record high of March 2012 was 44 percent. The rate on Spanish 10-year bonds meanwhile slid to 2.17 percent, or more than 5 percentage points below its 2012 crisis peak of 7.751 percent.

Samaras, announcing that Greece was negotiating with international creditors over a possible precautionary credit line should market borrowing costs spike after the country exits its rescue program, said on Oct. 17 that there was no need of a new bailout.

“Markets over-reacted and over-reaction will eventually give way to reality,” he said.


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