The eurozone's choice: do we hang together?

The leaders of the European Union's 27 member states are to decide next week (28-29 June) whether to launch the eurozone towards greater political and fiscal integration.

Such a dramatic step is what the eurozone's trading partners have been demanding, but significant differences persist between national governments over the extent to which they should share debt, create joint bank resolution schemes or intervene in bond markets. The European Council may be unable to go further than setting out a blueprint for future action.

The tone of next week's meeting will be set tomorrow (22 June) when the leaders of the eurozone's four biggest economies, Germany, France, Italy and Spain, meet in Rome. The outcome of the European Council may depend on the extent to which François Hollande, the president of France, and Mario Monti and Mariano Rajoy, the prime ministers of Italy and Spain, can persuade Angela Merkel, Germany's chancellor, to soften her stance against the mutualisation of debt, direct recapitalisation of banks by bypassing governments, and the creation of shared funds to stand behind Europe's biggest banks and protect depositors.

Merkel's insistence on further political integration, such as the establishment of a pan-EU bank supervisory body, before agreeing to common Eurobonds, will continue to be a source of discord. “It will certainly be easier to move on banks than other issues,” a senior EU diplomat said this week.

A meeting today (21 June) of the eurozone's finance ministers will be followed by a meeting tomorrow of the EU's finance ministers. They will consider the technical issues surrounding the rescue of Spain's banking sector and the potential renegotiation of Greece's bail-out conditions.

An audit of Spain's banks, showing how much extra capital the sector needs, is scheduled to be published today, and will determine exactly the extent of eurozone assistance required. The initial estimate two weeks ago was €100 billion, but since then Spain has come under renewed pressure from financial markets, with bond yields this week reaching new euro-era highs, suggesting that investors believe that the country will follow Greece, Ireland and Portugal in needing a full sovereign bail-out.

After a meeting this week of leaders of the G20 group of industrialised and emerging economies in Los Cabos, Mexico, the EU's leadership will be well aware of the pressure from international partners for a solution to the eurozone's difficulties. Barack Obama, the president of the US, said that he recognised EU leaders' “heightened sense of urgency”.

“Even if they cannot achieve all of it in one fell swoop, I think if people have a sense of where they are going, that can provide confidence and break the fever,” he said.

The final communiqué issued by the G20 yesterday (20 June) gave an indication of what the European Council is likely to aim for. The eurozone members of the G20 – France, Germany and Italy – will “take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks”, the statement said. It added that “a more integrated financial architecture, encompassing banking supervision, resolution and recapitalisation, and deposit insurance” was top of the list.

The G20 added that eurozone countries were “determined to move forward expeditiously” on issues such as the completion of the single market, the enlargement of the European Investment Bank, project bonds and the better use of the EU's structural funds and cohesion funds.

The eurozone's chances of forming a clear plan at the summit have been helped by the outcome of Sunday's general election in Greece, which enabled the main centre-right and centre-left parties, New Democracy and Pasok, to build a coalition government. Antonis Samaras, the leader of New Democracy, was sworn in as prime minister yesterday.

Although the two Greek parties have vowed to renegotiate the terms of the bail-out agreement, eurozone officials are confident that there will be no move to seek a complete overhaul of the austerity and reform conditions.