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Leaders face ambitious agenda at European summit

Wednesday - 6/27/2012, 4:06am  ET

By PAUL WISEMAN
AP Economics Writer

BRUSSELS (AP) - When they meet Thursday and Friday in Brussels, leaders of the 27 countries in the European Union will face a daunting task: Find a solution to a debt crisis that's spread misery across Europe, raised doubts about the euro currency, rattled investors and threatened global growth.

Investors have driven up interest rates on Spanish and Italian debt to unsustainable levels, raising the risk those big countries will need a bailout the rest of Europe can't afford. Unemployment in the 17 countries that use the euro is 11 percent, the highest since the euro was adopted in 1999.

A $125 billion plan to bail out Spanish banks has failed to calm financial markets. Even an election that brought a pro-euro-alliance Greek government to power failed to reassure investors that Greece would continue to pay its bills, keep using the euro and avoid a financial crackup that could set off a worldwide panic.

The EU leaders will consider plans to:

_Tackle Europe's government debt problems.

_ Fix Europe's banks.

_ Help Greece.

_ Stimulate Europe's sluggish economy.

Still, any proposals that might be approved at the summit may not be bold or fast enough to turn back the threats closing in on Europe. And Germany, wary of being stuck with the bill for a rescue plan, might veto the ideas first.

"We're seeing faster movement on the policy front," says Barry Eichengreen, an economist at the University of California, Berkeley. "The problem is, the crisis doesn't wait."

Here's a look at the more ambitious ideas policymakers are considering:

_ TACKLING DEBT

The worldwide financial crisis and the recession that followed ripped a hole in the budgets of many European governments, leaving them with huge debts. Greece's government debt now equals 165 percent of annual output; in Italy, it's 120 percent; in Ireland, 108 percent.

Economists say anything above 90 percent saps an economy's health. Bond investors, worried about the debt, are demanding higher interest rates. The result is that many countries' borrowing costs have reached unsustainable levels. Ireland, Portugal and Greece have already needed bailouts to pay their bills. Spain is receiving a loan to save its banks, and on Tuesday its borrowing costs soared in a pair of short-term auctions. Cyprus this week became the fifth European country to request a bailout.

Bailout money could run short if big countries like Italy need rescues, too. European leaders are expected to consider several ideas in Brussels:

_ Spreading some of the weak countries' debt loads to stronger countries that also use the euro. Alexander Hamilton, America's first Treasury secretary, did something similar in the 1790s. He had the U.S. government absorb the debts the 13 original states ran up fighting the American Revolution.

The 17 countries that use the euro could issue jointly guaranteed "eurobonds," sharing responsibility for the weakest countries' debts. These bonds could carry low interest rates because they'd be backed by the collective power of all the eurozone countries, including Germany. Or excessive government debts _ anything beyond 60 percent of a country's output _ could go into a "European debt redemption fund," guaranteed collectively and paid down over 20 to 25 years. Because the redemption fund would be a one-time move, it might be more palatable to Germany than a long-term eurobond plan.

_Handing power to a centralized eurozone budget authority to demand changes in individual countries' taxing and spending plans if they break budget rules. This idea goes beyond earlier calls for budget limits on eurozone countries. It was proposed on the eve of the summit by key European leaders.

_Tapping the $625 billion available from the eurozone's two bailout funds to buy government bonds on the open market. These purchases would drive the prices of the bonds up and the interest rates, or yields, on them down. That would help countries like Italy and Spain when they have to sell bonds to finance their deficits or replace maturing bonds.

_ FIXING BANKS

Europe doesn't just have a government debt crisis. It has a banking crisis, too. A collapse in housing prices buried Spanish and Irish banks in bad real estate loans. To rescue its banks, Ireland's government needed a $106 billion bailout. Now Spain needs a $125 billion loan from the rest of the eurozone to rebuild its banks' capital _ their defense against losses. At the same time, banks across Europe have been the biggest buyers of their governments' bonds. So as yields have surged and the bonds have declined in value, banks have suffered losses.

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