Europe and the Euro

European leaders need to think and act more boldly to stem the euro crisis

The pattern has grown tiresomely familiar. Bond markets shift sharply against weak euro-zone members. Leaders hold a crisis summit to save the euro with more forceful rescue measures. The initial euphoria lasts a few weeks, a few days or even just a few hours and the cycle begins once again. Can Europe's politicians ever break it?

To judge from this week's summit between Germany's Angela Merkel and France's Nicolas Sarkozy, the answer is no. The two came together in the holiday season partly because the markets had moved on from an assault on Italy to attack France, a core AAA-rated euro member. Investors were hoping for a deal to expand the euro zone's bail-out fund, the European Financial Stability Facility (EFSF), or to start issuing mutually guaranteed Eurobonds. Instead the two leaders did little beyond repeating previous accords, promising stronger euro-zone economic governance and putting up such distractions as a financial-transactions tax, harmonised corporate taxes and constitutional commitments to balance budgets along with more euro-zone summits in future.

The markets were unimpressed. A day later the European Central Bank was again buying Spanish and Italian government bonds, having spent Ç22 billion ($32 billion) the previous week. The latest shockingly low growth figures for the euro zone in the second quarter may partly reflect fiscal austerity, but they also suggest that it will be harder than ever for troubled economies to grow out of their debt burdens.

It is understandable that Mrs Merkel, in particular, should be loth to embrace bold new rescue plans. She is cautious by nature, more a follower than a leader. She recognises the deep hostility of her voters to big fiscal transfers to weaker, more profligate euro-zone countries. She is already finding it hard to persuade her coalition partners to support in parliament the deal she struck in July to expand the EFSF's powers and let it buy up government debt. She is mindful that the Bundesbank is vociferously against a big ECB program to buy government bonds (the ECB has already spent Ç100 billion). And she fears that her country's constitutional court may rule all euro zone bail-outs to be illegal.

Yet Mrs Merkel needs to be mindful of something else as well: that the current rescue plan for the euro is just not working. The markets continue to price in default by Portugal as well as Greece (though the third bailed-out country, Ireland, is looking a bit healthier). The attempt to limit the trouble to these three and stop contagion spreading to Spain has manifestly failed: instead Italy and now France, both of which seem to be solvent, have been infected. A year ago it was said that the euro zone could take care of two or three small countries but that Spain was too big to fail. Today, with Italy and even France looming into the picture, the very survival of the euro is coming into question.

A break-up of the euro may not be unthinkable, but it would certainly be damaging, painful and very expensive. This is most obvious for debtor countries whose banks and governments would go bust; but Germany and other creditors would also pay an extremely high price. And the consequences would be scarily unpredictable: Europe's single market, and even the European Union itself, might be at risk.Explore our interactive guide to Europe's troubled economies. Mrs Merkel must know that it is worth paying a lot to avoid all this.

That means, at minimum, a large expansion of the EFSF, to at least Ç1 trillion, though there is a limit to how much bigger it can get without denting some creditor countries ratings.

It is likely to require further large-scale bond-buying by the ECB.

It involves accepting bigger restructuring of Greek and maybe other debt. In the end, it may even necessitate mutually guaranteed Eurobonds.

Honesty is the best policy

Any or all of these measures have three things in common: they involve stronger countries giving more support to weaker countries; to offset this, they require intrusive outside control of national fiscal policies. They thus constitute a step towards political union. That is what airy labels like 'economic government' or 'deeper integration' actually mean. The problem is that most governments have no mandate from voters to move in this direction. Politicians therefore need to start explaining to their electorates the choices they face, and the consequences of those choices. If Europe's leaders sign up for a level of integration deeper than voters want, the backlash could split the EU apart exactly the outcome they are trying to avoid.

Stock markets end turbulent week with more losses

Major European share markets closed lower on Friday, ending another turbulent week.

Continued fears about a slowdown in the global economy and high levels of debt in the eurozone had driven indexes lower for much of the day.

At one point, European markets were sharply lower, with falls of more than 3% for some leading indexes.

By the close, London's FTSE 100 was down 1%, Paris's Cac was down 1.9% and Frankfurt's Dax was down 2.2%.

The losses leave the 100 index down 13% on the month, with the French and German markets worse hit, losing 18.3% and 24% respectively. In New York, falls extended in late trade to take the Dow Jones to a close of 1.57%.

Gold remained a favourite with investors flocking to buy into its safe-haven image and spot gold hit a new record of $1,877 before slipping back to $1,846.50.

Alan Brown, Schroders' group chief investment officer, said: "It is the end of a really torrid week."

Investors are worried global growth is slowing, and that major economies may be heading back into recession.

A former governor of the US Federal Reserve, Laurence Meyer, said he thought the US would manage to avoid a downturn: "I think the most likely development is that we get some rebound - modest, disappointing - rebound in the second half.

"We think there are still some underlying strengths and a lot of positive factors, but not enough to keep the economy above trend, not enough to put the unemployment rate on a downward trend."

In addition, the Greek finance minister tried to reassure investors that his country's new bailout deal was not in doubt.

Evangelos Venizelos' comments came after four countries demanded collateral in exchange for their contributions to the 109bn-euro (ú95bn) loan, after Finland agreed a deal with the Greek government.

Austria, the Netherlands, Slovenia and Slovakia have all said they want to do the same, which could complicate efforts to finalise the rescue deal. This underlined concerns that the eurozone debt crisis could be far from over.

Rebels battle for Zawiya and Zlitan

Rebels in Libya fighting to overthrow Col Muammar Gaddafi have been involved in fierce battles in two coastal cities as they close in on Tripoli.

The rebels say they seized control of Zlitan, 160km (100 miles) east of the capital, after sustaining heavy losses.

To the west, the rebels claimed they were clearing out the last pro-Gaddafi troops from Zawiya, 30km from Tripoli.

As the rebels advance, plans are being made to evacuate thousands of foreign workers stranded in the city.

"The fighters have liberated Zlitan and they are fighting west of the city," the Associated Press news agency quoted Munir Ramzi of the opposition Misrata Military Council as saying.

He said the rebels were in control of the city and Col Gaddafi's forces were fleeing after Friday's fighting.

Thirty-one rebels were killed and 120 wounded in fighting which lasted for much of the day, he said.

Syria protests, deaths in anti-Assad demonstrations

At least 20 people are reported to have been killed and dozens injured in Syria as army and police opened fire on anti-government protesters.

Activists said most of the deaths were in southern Deraa province, but there were also reports of shootings in Homs.

On Thursday, the US led unprecedented calls for Syrian President Bashar al-Assad to step down.

Earlier, Mr Assad told the United Nations that police and army operations against civilians had halted.

Russia rejected the US calls for President Assad to go, saying he should be given more time to enact reforms. And Syria's UN envoy accused the US of trying to instigate insurrection.

All the signs, at least from activist accounts and many internet video postings, are that nothing much has changed, following President Assad's announcement late on Wednesday that army and police operations against civilians had stopped.

He's under stronger than ever pressure to change course. Europe has now followed the American lead and is tightening sanctions on individuals and companies close to the regime, and it's planning to impose an embargo on oil and gas products too. But there's no real sign that all this is bringing about a change of heart in Damascus.