Disputes rage in Europe on eve of debt crisis summit

A FLARE-UP over the European Central Bank and political turmoil in Italy kept the eurozone on edge last night on the eve of today’s summit meant to confront the currency bloc’s worsening sovereign debt crisis.

Just hours before European leaders are due to adopt a plan to reduce Greece’s debt burden, fortify European banks to withstand bond losses and scale up the eurozone rescue fund to prevent market contagion, disputes raged in Rome and Berlin.

German Chancellor Angela Merkel opposed a phrase in a draft conclusion for the summit that calls for the ECB to continue buying bonds in the secondary market, while a meeting of EU finance ministers was cancelled as the details of issues to be discussed had not been finalised.

There was no sign of a deal to reduce Greece’s debt to private sector bondholders, and uncertainties remained over the size of a planned bank recapitalisation and the scope for leveraging the rescue fund.

As a result, few figures may emerge from today’s summit, expected to run late into the night.

Merkel, fighting to sec-ure parliamentary backing for eurozone rescue measures, said Germany opposed a phrase in the draft summit conclusions urging the ECB to go on buying bonds of troubled states.

The draft, seen by Reuters, supports a continuation of “non-standard measures in the current exceptional financial market environment”.

“This sentence is not agreed with us,” Merkel told reporters, adding that Germany did not want a declaration from politicians telling the ECB what to do.

An opposition lawmaker said the German parliament would try to point the ECB in the opposite direction, expressing the expectation in a joint motion today that the ECB would stop its bond purchases on the secondary market.

Test votes in her centre-right coalition showed Merkel was likely to win a narrow majority of her own supporters, but 16 dissidents would abstain or vote against the motion.

The euro and European stocks slipped and safe-haven German bonds rose after Merkel’s comments.

Meanwhile. Italian Prime Minister Silvio Berlusconi’s centre-right coalition was split after the cabinet failed to agree on Monday on raising the retirement age, an economic reform demanded by EU partners as a condition for supporting its bonds.

Berlusconi responded truculently to public pressure from French President Nicolas Sarkozy and Merkel at an EU meeting on Sunday, saying no one could teach Italy lessons.

The European Commission said the aim was not to humiliate Italy, but to ensure that a member state meets its commitments on budget discipline and economic co-ordination.

Berlusconi’s Northern League coalition partners oppose raising the retirement age to 67 from 65, as their leader Umberto Bossi told reporters the government could fall over the demands. There is growing speculation of early elections next spring.

Italy has the euro zone’s largest sovereign bond market, with public debt of €1.8tr, 120% of GDP.