Is the eurozone on the brink?

Leaders from across Europe are convening in Brussels for crunch meetings on Wednesday to try and solve the financial crisis engulfing the eurozone.

In a bid to finally get the debt crisis under control, Europe’s leaders are close to agreement on boosting the size of a bailout fund, protecting eurozone economies and banks’ balance sheets.

The crisis began in countries like Greece but has now spread to include Italy and others, threatening European banks and even the single currency itself, as well as raising fears that there could be global economic repercussions.

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Markets in the United States as well as the UK fell over fears that a deal in Europe could be delayed after a meeting of European finance ministers was cancelled. But a summit of all 27 leaders, followed by a longer session of the 17 countries which have the euro currency, will still go ahead.

Tomorrow is the meeting everyone is focusing on. The markets need clarification on how the eurozone sits and how the banks are going to be capitalised. Jeremy Steinson, Killik Capital

There are also fears that political rivalries in Italy could stall the deal yet further, as Prime Minister Silvio Berlusconi’s main coalition partners warned the Italian government could fall trying to implement new measures tied to the bailout.

Skittish markets

When news broke that the finance ministers’ meeting had been cancelled, the markets reacted negatively, leading to a 70-point fall in the value of the FTSE share index in the UK. Shortly afterwards, there was a rally when it was confirmed that European heads of government would still be meeting at a summit in Brussels.

Jeremy Steinson, trading services manager at Killik Capital stockbrokers, told the Channel 4 News the markets had initially assumed the summit had been cancelled, and their reaction showed “just how jolty” they had become.

Mr Steinson said the markets were looking for evidence that European governments intended to take bold action to deal with the debt crisis.

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“I think at the moment tomorrow is the meeting everyone is focusing on. The markets need clarification on how the eurozone sits and how the banks are going to be capitalised.

“They’re also looking to see if there’s a further writedown in Greek debt.”

Mr Steinson said there was hope that Germany would agree to a big improvement in the firepower of the 440bn euro bailout fund, with expectations of an increase to 1tr euros.

“Detail is the key, accurate figures and how it is going to be implemented,” he said.

Italy

In Italy, one of the countries that leaders hope will be shielded by the new bailout deal, Prime Minister Silvio Berlusconi‘s main coalition partners warned that the government could fall amid fierce debate over some of the measures demanded by other eurozone partners.

EU leaders, led by German Chancellor Angela Merkel and French President Nicolas Sarkozy, have asked that Berlusconi present firm plans to promote growth and reduce Italy’s massive debt in time for Wednesday’s summit meeting.

An emergency cabinet meeting late on Monday ended without agreement after Berlusconi’s coalition allies in the Northern League party refused to budge on their opposition to raising the pension age to 67 years from 65 at present.

On Tuesday, as leaders from the deeply divided coalition parties held a series of meetings in Rome, League leader Umberto Bossi said the disagreement could bring down the government and force early elections.

“The government is at risk,” Bossi told reporters in parliament. “The situation is difficult, very dangerous. This is a dramatic moment,” he said.

‘Breathing space’

In the UK, Bank of England Governor Sir Mervyn King has told MPs that whatever is agreed at the meeting will only provide “a year or possibly two years’ breathing space” and the underlying problems remain.

Sir Mervyn told the Treasury select committee: “The aim of the measures to be introduced over the next few days is to create a year or possibly two years’ breathing space. The underlying problems still have to be resolved.”

And Prime Minister David Cameron is facing his own problems on Europe. As Europe scrabbles to avert financial disaster, the prime minister faced a rebellion by MPs over whether the UK should be in Europe at all.

While MPs voted against holding a referendum, 81 Conservative rebels opposed the party line in defiance of Mr Cameron’s orders.