Cyprus bailout looms large over EU summit

European Union leaders meet Thursday and Friday with another eurozone debt bailout, this time for Cyprus, looming on the horizon as Europe's faltering economy and soaring unemployment stoke unease at stinging austerity policies. Dutch Finance Minister Jeroen Dijsselbloem said Wednesday that he and his eurozone colleagues would meet after the EU summit late Friday to work on a bailout plan for Cyprus - following previous rescues for Greece, Ireland, Portugal, and for Spanish banks. Cyprus government spokesman Christos Stylianides said just-elected President Nicos Anastasiades hoped "to create a positive climate" at the summit in Brussels. A final deal on a bailout is expected later this month. There has been much debate over a compulsory reduction, or haircut, on deposits in local banks to cut the overall cost of the rescue but Nicosia says this would be catastrophic, not only for Cyprus but for the entire 17-nation bloc, and the idea seems to be losing ground. "The situation is difficult but there is no reason for panic," said Stylianides, adding there would be no haircut and no further cuts in public sector pensions and salaries. "Patience is required and you will see that hard work brings good results," Anastasiades said as he left for Brussels. The mooted 17-billion euro ($22.2 billion) bailout is roughly the same as the island's total economic output and would increase debt to more than 140 percent of gross domestic product (GDP), a level considered unsustainable in the long run. EU officials said the 27 EU leaders will discuss Cyprus, taking the opportunity to meet its newly elected president, but not make any decisions at their summit. Their focus rather will be on finding how to ensure a better balance between the need for austerity and spending more money to generate growth and badly-needed jobs. Italian elections in February saw a new anti-austerity party win a stunning 25 percent of the vote, a warning for hardliners such as German Chancellor Angela Merkel who faces polls later in the year. Leaders may get the message directly on Thursday when unions from across Europe plan an "anti-austerity" demonstration near the summit's EU headquarters venue in Brussels. A draft of the summit conclusions says that with no growth expected this year and "unacceptably high levels of unemployment", it is critical to support growth "as a matter of priority." Member states must continue to make progress on stabilising their strained public finances but this should be done through "growth-friendly fiscal consolidation," the draft adds. "Hiding in this language is the idea that you can stretch the time (to meet deficit targets) a bit...while those in a stronger position can increase expenditure," an EU official said. Leaders will try to establish "what growth-friendly fiscal consolidation really means" in practice, the official said, with the conclusions leaning more towards greater flexibility of the sort favoured by France. President Francois Hollande notably conceded Tuesday that France would not be able to cut its public deficit to the EU limit of 3.0 percent of gross domestic product this year, coming in instead at 3.7 percent of GDP as a weak economy exacts its toll. Another EU official stressed that the choice was not between austerity and growth, since one was a condition for the other as member states had to show enough fiscal discipline to reassure markets and establish the stability essential to getting the economy back on track. The summit, the official said, is about "coming to pragmatic conclusions," recalling a whole series of measures agreed previously to tame the debt crisis and on which work still needed to be done and implemented. Leaders will also look at progress on a banking union based on an already agreed Single Supervisory Mechanism, plus a deposit guarantee and bank winding up system which need to be finalised by June to make further headway. On Friday, they will review relations with the EU's strategic partners, in this case Russia, with whom relations have been strained by Russian President Vladimir Putin's clampdown on the opposition. Earlier this week, EU foreign affairs head Catherine Ashton said the bloc had strong concerns over "recent developments that limit the activities of Russian civil society and negatively influence the democratic rights and freedom within the country."