Leader: Stakes could not be higher in crucial EU summit

A GENUINE breakthrough ahead in the eurozone crisis – or another desperate clutching at straws? Financial markets rallied strongly this week on speculation that progress on a resolution of the crisis may be reached at a critical EU summit next Thursday.

German chancellor Angela Merkel insists that a new EU treaty is needed to set up a fiscal union in the eurozone, but it is a process, she added, that “could take years”. Markets, meanwhile, will insist on evidence of progress over the next few critical days if this rally is to be sustained.

This is yet another “make-or-break” summit and the stakes could scarcely be higher. The week has brought dire warnings from Bank of England Governor Mervyn King to UK banks to prepare for the worst – widely interpreted as a break-up of the eurozone – as Mrs Merkel reiterated her opposition to the European Central Bank issuing Eurobonds backed by eurozone members. “A joint liability for others’ debts is not acceptable,” she said. “Eurobonds are not a rescue measure in this crisis.”

The alternative is a rapid move towards central oversight and control of eurozone member borrowings, budgets and tax policies, so that effective action is taken to bear down on current debt excesses and future crises avoided. But this leap towards political union with Germany as the dominant player poses major difficulties for Prime Minister David Cameron, in Paris yesterday for talks with Nicolas Sarkozy.

While the French president insisted a new treaty was needed to impose fiscal discipline, Mr Cameron argued that steps could be taken to shore up the single currency and improve the competitiveness of weaker countries without treaty change. A new treaty would almost certainly trigger a referendum in the UK and calls for a repatriation of powers from Brussels, as any changes to the Maastricht rules need to be agreed by all 27 EU members.

Mr Cameron, already fearing that a tighter, more centralised eurozone could further marginalise Britain’s influence, is also concerned that a treaty change would trigger demands for a referendum on Britain’s relationship with the EU. This, in turn, could see the Conservative Party plunged into renewed convulsions over Britain’s membership.

However, even progress towards a new fiscal union within the euro bloc is unlikely to assuage concerns over the parlous financial state of indebted countries, in particular Greece. Here, markets have already priced in the likelihood of default. Much now rests on the negotiations now under way in the run-up to the summit. If the outcome fails to ease sovereign debt concerns, more massive global intervention will be needed. We are back again to a nightmare countdown for a deal in the final minutes of the 11th hour.

Failure to reach agreement would confirm a plunge into recession and an intensifying capital flight from the whole of the eurozone.