Jan. 2 (Bloomberg) -- European leaders return to work
this week seeking to buy time for the Spanish and Italian governments to
wrest control over their debt and rescue the single currency from
fragmentation in its 10th anniversary year.
Some 157 billion euros ($203 billion) in debt will
mature in the 17-member euro area in the first three months of 2012,
according to UBS AG. By the end of that period, leaders have pledged to
draft a stricter rulebook for controlling government spending. German
Chancellor Angela Merkel and French President Nicolas Sarkozy will meet
in Berlin Jan. 9 to work out details.
"The road to overcoming this won't be without
setbacks, but at the end of this path Europe will emerge stronger from
the crisis than before," Merkel said in a New Year's speech broadcast
Dec. 31. Merkel, whose first official public appointment is on Jan. 5,
reiterated that her government will do "everything" to bring the euro
out of the slump.
Ten years after euro bank notes replaced national
currencies on Jan. 1, 2002, the euro has for the first time recorded two
consecutive annual losses against the U.S. dollar while plunging to a
record low against the yen. That raises the pressure on euro leaders as
they struggle to hold the monetary union together in the face of credit
downgrades, European Union splits and a looming recession that might
compound rising debt.
Stocks Rise
European shares rose on the first trading day of 2012,
with the Stoxx Europe 600 Index up 0.8 percent as of 3:33 p.m. in
Berlin. The gauge slumped 11 percent last year.
The euro slid 0.2 percent to $1.2934 after earlier
dropping as much as 0.4 percent. The single currency lost 3 percent
against the dollar last year, ending at $1.2961, a decline of 13 percent
from its 2011 high of $1.4830 on May 2. It lost 3.2 percent in the last
quarter.
The latest crack in Europe's crisis-fighting plans
appeared on Dec. 30, when Spain's new government said 2011's budget
deficit would reach 8 percent of output, 2 percent more than the
previous government had projected and more than the 6.9 percent expected
by economists surveyed by Bloomberg. Prime Minister Mariano Rajoy
responded by unveiling a new package of spending cuts and tax increases.
Still, the key to the euro's survival may lie with
Italy, the group's third-largest economy and the second most-indebted
after Greece. The government in Rome must repay 53 billion euros in debt
in the first quarter, about a third of the euro area's total amount for
the period, after Prime Minister Mario Monti passed an emergency budget
package aimed at curtailing borrowing costs.
Italian Yields
Italy's 10-year yield ended 2011 near the 7 percent
mark that led Greece, Ireland and Portugal to seek bailouts. Spain's
equivalent yield finished the year just above 5 percent. Italian 10-year
yields dropped 13 basis points to 6.97 percent today, while Spanish
yields were little changed at 5.10 percent.
"If the Italian yields start to rise, you could
quickly turn a manageable situation into an insolvent one," Michael
Spence, a professor of economics at New York University and a Nobel
laureate, said on Bloomberg Television Dec. 28. "Italy needs time and
Europe needs to help buy them some of the time."
German Finance Minister Wolfgang Schaeuble echoed that
strategy, telling the Bild newspaper yesterday that European rescue
funds can only "buy time" before indebted states take "the necessary
measures to win back confidence."
French Possibilities
Sarkozy said that the French government will turn from
budget fighting to economic growth and unemployment in 2012, which will
be "the year of all risks and of all possibilities," he said Dec. 31 in
his fifth New Year's address, the last before he faces a re-election
contest in May. Sarkozy will meet with Italy's Monti in Paris on Jan. 6.
In his New Year's message to Greek citizens, Prime
Minister Lucas Papademos said his nation will confront a "difficult"
2012 and said that the "next three months will be particularly crucial."
Papademos, appointed on Nov. 11 as head of a
government backed by three of the five parliamentary parties, is trying
to secure loans under a 130 billion-euro bailout for Greece agreed to in
October by EU leaders before elections are held. Measures include
negotiating a debt swap with private creditors that will cut 100 billion
euros off Greece's burden.
As Europe's leaders tinker at a new budget framework
and craft the so-called firewall that will prop up ailing states,
Bundesbank President Jens Weidmann said that the European Central Bank
won't "step into the breach for fiscal policy."
ECB Limits
"We have to make it clear where our legal, but also
our real limits, are," Weidmann, who is a council member of the
Frankfurt-based ECB, told Tagesspiegel newspaper yesterday.
Fiscal and monetary efforts could be hampered by a
shrinking economy in the euro area, which would crimp tax revenues and
fuel unemployment. The economy of the 17-nation area will shrink by
about 0.7 percent this year, said Howard Archer, an economist at IHS
Global Insight in London.
"We expect eurozone recession to occur in late-2011
and the first half of 2012 in the face of the ongoing eurozone sovereign
debt crisis," Archer wrote in a Dec. 30 note to clients. "It is vital
that eurozone policy makers get a real grip on matters quickly."
--With assistance from Brian Parkin in Berlin, Angeline Benoit and
Emma Ross-Thomas in Madrid, Gregory Viscusi in Paris, Chiara Vasarri in
Milan and Tom Stoukas in Athens. Editors: Dick Schumacher, Alan Crawford
To contact the reporter on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
