EU rescue

Despite some tentative support from the center-left opposition in a meeting late Monday between Italian Prime Minister Silvio Berlusconi and his ministers, Italy's cabinet has failed to agree on a set of proposed pension reforms requested by the European Union.

Following the meeting, Berlusconi hosted a working dinner with Economy Minister Giulio Tremonti and three other ministers representing the government's junior partner, the Northern League, which opposes plans to raise the retirement age and has threatened to pull out of the government over the issue.

Berlusconi's conservative government is also reportedly considering further options to relaunch the Italian economy and tackle its massive debt, including the privatization of state-controlled companies and a sell-off of state assets.

If Italy fails, all the EU's bailout plans can be forgotten, according to Daniel Gros, director of the Centre for European Policy Studies in Brussels.

"Italy will decide the future of the euro," said Gros. "It is the be-all and end-all."

United front

German Chancellor Angela Merkel and French President Nicolas Sarkozy made every effort to paint a picture of harmony as Sunday's crucial EU summit drew to a close. On the agenda were a Greek debt cut, a bank rescue package and the expansion of the eurozone's emergency bailout fund, the European Financial Stability Facility (EFSF), all of which remained largely unresolved.

Nevertheless Merkel and Sarkozy were united, emphasizing their desire to work together to find a lasting solution to the debt crisis.

It was in this vein that Merkel and Sarkozy gave a joint press conference on Sunday evening. The French president said the participants had largely agreed to expand the EFSF. The technical details of this agreement, which is to go a vote in the German parliament, are still to be formulated.

No simple resolution

Merkel also blocked suggestions that the European Central Bank (ECB) should contribute to an increased bailout. As a result it seems the ECB's printing press will remain off limits for the EFSF.

Economic experts are currently working out two alternative solutions that rely on partial guarantees for investors who purchase government bonds from troubled eurozone nations.

But the chancellor couldn't guarantee that these solutions would work.

"Almost none of the experts looking into this can say which decision is 100 percent the right one," said Merkel. "That's because we are entering unknown territory; something like this has never happened before in a monetary union like the eurozone."

"We are politically responsible, not just to make brave decisions but also to estimate what the consequences will be," she added.

Bank rescue

Uncertainty also surrounds the potential impact of increasing equity for European banks. The eurozone heads agreed on this measure, in principle, to ensure that the banks can cope with likely losses in Greece and other indebted countries.

The details are still unclear and can only be finally decided on in conjunction with a third issue - the debt haircut of 50 to 60 percent for Greece.

Greece's creditors will be expected to suffer a writedown on their holdings, and negotiations are currently under way with the banks. It is still unclear whether any real results will come out of the crisis meeting on Wednesday, but what is clear is that banks in Greece, France, Spain and Italy will be particularly affected.

Many hurdles remain

According to Merkel, the second EU summit on Wednesday is unlikely to be the last on this issue. She says the future shape of the monetary union are still to be discussed and control mechanisms must be strengthened.

"There are therefore many steps left to take," said Merkel. "But during the upcoming discussion on Wednesday we must take very clear steps which complement each other."

Several EU leaders claim that after tackling the eurozone's current problems, new rules must be defined. But many are skeptical about any direct intervention from an EU supervisory authority.

Germany wants to enforce strict rules, rigorous controls and a legal right allowing nations that live beyond their means to be hauled before the European Court of Justice - even if this means making changes to the EU treaty. But in the past, that process has been relatively slow. Ministers intend to discuss it further in December.

Italy under pressure

In order for the financial markets to regain enough confidence in the eurozone to continue to invest in Spanish, Italian and French government bonds, Italy in particular is being asked to impose further economic and structural reforms.

That was the message that Merkel and Sarkozy had for Berlusconi when they met with him Sunday. "We remain confident in the political, financial and economic sense of accountability among all Italian decision makers," Sarkozy said.

Herman Van Rompuy, president of the European Union, was more pointed in his advice to Berlusconi. He publicly ordered Italy to increase efforts to ensure that investors don't lose confidence in the struggling eurozone country.

Italy has a debt of almost 2 trillion euros, which would almost certainly overwhelm the EU rescue fund.

Key summit

Wednesday's emergency summit will see all EU government heads gather to reach a decision on Europe's banks. Non-euro members Poland and Great Britain have insisted that the 10 countries not in the single currency be fully involved in the crisis response.

On Wednesday evening, eurozone leaders are expected to adopt a rescue package with new measures relating to Greece. First the German parliament in Berlin must vote in favor of boosting the EFSF rescue fund.

Luxembourg's Prime Minister Jean-Claude Juncker has, however, criticized the influence of the Bundestag. Besides Germany, there are nine other EU states that require parliamentary approval in law, but none of them are as strict as Germany.

Christine Lagarde, chief of the International Monetary Fund, has meanwhile praised the efforts of the eurozone. "It is well to its way to recovery," she asserted. The IMF contributes one third of the total aid package for Greece, Ireland and Portugal.

Author: Bernd Riegert / ccp, cmk (dpa, Reuters)
Editor: Andy Valvur