Germans Back Bailout Fund as Rifts Persist in Euro Talks

BRUSSELS — European leaders struggled Wednesday to reassure the world they were making progress in

overcoming the two-year-old euro zone debt crisis, with German lawmakers approving a proposal to strengthen an

 emergency bailout fund ahead of a summit meeting later in the day promoted as the moment for a comprehensive

 solution.

The vote to expand the bailout fund passed by a strong margin in Germany’s lower house. It followed Chancellor Angela Merkel’s plea to lawmakers to overcome their aversion to risk and put the might of Germany, Europe’s strongest economy, firmly behind efforts to get control of the crisis, which has unnerved financial markets far beyond Europe’s borders.

“The world is looking at Germany, whether we are strong enough to accept responsibility for the biggest crisis since World War II,” Mrs. Merkel said in an address to the Parliament in Berlin. “It would be irresponsible not to assume the risk.”

The administration of President Nicholas Sarkozy of France, who has also sought to project his intention for a decisive outcome at the summit in Brussels, said there was no other choice. “France is totally mobilized and engaged in the success of today’s summit,” Mr. Sarkozy’s budget minister, Valérie Pécresse, was quoted as saying by Bloomberg News in Cannes, France, where she was preparing for a Group of 20 summit there next month.

Nonetheless, fissures and significant disagreements among the Europeans were still unresolved ahead of the summit, particularly concerning Italy, the euro zone’s third-largest economy, where Prime Minister Silvio Berlusconi won only provisional support for economic reforms demanded by his European partners.

The overall euro deal under discussion is complicated, including a deep restructuring of Greek debt, an injection of new capital into European banks made vulnerable by exposure to sovereign debt and an expansion of a bailout fund so that it can ward off a financial panic in Italy as well as in the relatively small economies of Greece and Portugal.

On several previous occasions, European leaders have promised systemic changes to resolve the euro’s troubles, only to come up with a patchwork that fails to mollify the markets and just delays the day of reckoning. The outcome after the Wednesday summit could be another disappointment, an agreement on a general plan but without many specifics, and possibly without the massive “wall of money” to protect vulnerable Italy and Spain that the markets have demanded.

In addition, a meeting of European Union finance ministers, set for Wednesday before the summit meeting, was abruptly canceled on Tuesday, largely because of continuing negotiations with banks over a reduction in the face value of Greek debt — a so-called haircut — of up to 60 percent instead of the 21 percent previously agreed to but considered grossly inadequate by most economists.

The Europeans want the banks to agree to the losses voluntarily, to avoid a formal default that would incite unpredictable events. But the banks have negotiating capital, too, and are stretching out the talks. At the same time, officials in Brussels said, it was difficult to sign off on bank recapitalization — considered pretty much a done deal — until they were clear about the real value of the Greek debt in the banks’ portfolios.

The Europeans also want Mr. Berlusconi to live up to his promises to do more to reduce Italy’s huge accumulated debt — about $2.65 trillion euros, or 120 percent of gross domestic product, among the highest in the developed world — and to promote economic growth in a largely stagnant economy. While Italy’s annual deficit is modest, the debt overhang means that speculation is driving up the cost of financing that debt, which if unchecked, could tear holes in the budget.

Mrs. Merkel and Mr. Sarkozy upbraided Mr. Berlusconi on Sunday for not following through on his promises. But the sense of urgency about the fate of the euro that is building in other European capitals seems not to have arrived yet in Rome, where Mr. Berlusconi, hobbled in an internal power struggle, planned to bring only a “letter of intent” to make the kind of economic changes that his counterparts want.

The current crisis has placed Mr. Berlusconi between two irreconcilable forces: his fellow European Union leaders and Umberto Bossi, the leader of the powerful Northern League, who holds the fate of the Berlusconi government in his hands and is bound to Mr. Berlusconi like an inoperable Siamese twin.

For months, Mr. Bossi had refused to back a plan to raise the retirement age to 67, relenting only on Tuesday for everything except seniority pensions, still leaving the government at risk of collapse on the issue. That change had been demanded by the European Union in return for its support.

The European Central Bank demanded various changes as the price for buying up Italian debt at a reasonable, nonmarket price. But as soon as the bank stepped in, Mr. Berlusconi failed to propose a convincing package of measures, let alone put them into effect, infuriating his European counterparts and the bank.

Given reasonable progress made by Ireland, Portugal and Spain to fix their fiscal problems, the vulnerability of the far larger economy of Italy is the main reason the Europeans are trying to enlarge, or leverage, their bailout fund, the European Financial Stability Facility, which at around $600 billion is considered less than half as large as needed to cover Italy’s debts. At least $200 billion of this fund is already committed to Greece, Ireland and Portugal, and European leaders have not yet agreed on at least two options they are considering for enlarging the fund.

One idea is to try to attract outside investors, possibly with the help of the International Monetary Fund, but it is unclear what guarantees outsiders would demand.

A parallel idea, which could run simultaneously, is to use the fund to limit losses bondholders might suffer in the future.

However, Mr. Bossi said that he remained pessimistic about finding a way through the thickets to a comprehensive rescue plan for the euro.

“The government still risks falling on the question of pensions,” he said. “Now we have to see what the E.U. says.”

Mr. Bossi added that he refused to budge on a plan to raise the retirement age to 67 in the case of workers who had worked 40 years and contributed to the public pension plan.

On Tuesday evening, however, an 11th-hour accord seemed to be emerging under which the retirement age would be raised but people who have been paying for 40 years could retire.

Details of the proposed growth measures Mr. Berlusconi will present to Brussels have not been made public, but Italian news media reported that they would include privatizations, a liberalization of Italy’s professions and a simplifying of bureaucratic red tape.

But some critics dismissed the proposals as window dressing.

“They will send the letter, but there’s the risk that they will only be empty promises with no real ability to carry out reforms if they are still missing a strong agreement with the Northern League,” said Stefano Folli, a columnist for the economic daily Il Sole 24 Ore.

Italy’s fundamentals, other than its enormous debt, are relatively strong, but its fragile political leadership adds to market uncertainty, said Marco Fortis, an economist at Milan’s Cattolica University. “The only thing that’s missing is a government that can make decisions and gives signals to the markets that the country is not at risk,” he said.

On Tuesday, Italy’s president, Giorgio Napolitano, urged the government to act quickly and “make our commitment to lower the debt and boost economic growth more credible.”