EU leaders battle to reshape euro

EU leaders battled Thursday to restore faith in the future of the euro while debating how to bring battered economies such as Italy and Spain back from the brink. The 27 EU heads of state and government huddled for a two-day summit among market jitters and pressure from global leaders to find a solution to prevent the debt crisis from dragging down the world economy. The most likely concrete result from the first day of talks was a so-called "growth compact" -- a package of measures amounting to some 120-130 billion euros ($150-$160 billion) to boost output and create jobs in the eurozone. The measures, agreed in principle by the leaders of France, Germany, Italy and France at a mini-summit last week, would redirect unspent EU funds to the most needy countries and bolster the coffers of the European Investment Bank. "Growth must be at the heart of our commitments," said French President Francois Hollande as he arrived for the meeting. Weighing in behind the new French leader, German Chancellor Angela Merkel agreed Europe needed growth to revive sluggish economies facing record 11 percent joblessness. "We have worked out a good programme, in particular for future investment and to give young people a better chance at a job," she said. "I hope that we can agree this pact today and give an important signal -- combined with the fiscal pact -- that on one hand we of course need solid budgets and on the other hand ... also growth and jobs," added the chancellor. Opening the meeting, EU President Herman Van Rompuy, said: "People in our countries are worried about the present and nervous about the future." Leaders had to make progress on bolstering the crippled eurozone economy, Van Rompuy insisted. "Europeans expect no less from us." Stocks and the euro slid as the markets braced for disappointment. Ratcheting up the pressure, Spanish Prime Minister Mariano Rajoy warned his country could not long withstand high borrowing costs imposed by bond markets and cautioned that key bodies were running out of cash. "There are many Spanish public institutions that cannot finance themselves," he warned on the sidelines of the meeting. Just hours before, Italy had to pay higher rates on five and ten-year debt, amid ongoing market tension as the crisis creeps from the edges of the eurozone to the centre. "There will be a domino effect across all of Europe. We need emergency measures," said Belgian Prime Minister Elio Di Rupo as he joined counterparts. Greek Prime Minister Antonis Samaras, meanwhile, sent a letter to EU leaders asking for changes to the country's bailout due to a worse-than-expected recession. Despite a public show of unity on arrival for the meeting, deep divisions remained about how to tackle the immediate problem of spiralling borrowing costs. Italy, Spain and France want the EU's bailout fund to buy government bonds on the market to drive down borrowing costs, while also moving towards a joint pooling of debt in the eurozone. Direct intervention by the fund in bond markets was the focus of negotiations among eurozone treasury officials on the sidelines of the summit. However, Merkel has refused to bend on these issues, insisting on strict conditions to bond-buying and saying eurobonds are "economically wrong and counterproductive." Berlin believes a pooling of debt will be possible only after deeper integration among eurozone nations and more centralised control of their economic policies -- the other main concern for leaders at the summit. Among integration proposals mulled at the summit is a banking union with a centralised supervisory body, joint deposit guarantee schemes, and the means to wind up failing banks. Concerns over Europe's stressed banks are also dividing summit leaders. Madrid wants the EU's 500-billion-euro ($622 billion) bailout fund to be able to recapitalise banks directly, to avoid piling more pressure on indebted governments. But Berlin insists governments are ultimately responsible for loans. Some analysts however look towards the powerful Frankfurt-based European Central Bank (ECB) to rescue the situation. "Europe urgently needs to break the cycle of fear: It needs ECB action," wrote Holger Schmieding, chief economist at Berenberg Bank. While the central bank "cannot fix underlying and structural problems", it has "the power to stop any market panic and prevent financial contagion," he said.