EURO ZONE CRISIS BOILS AS LEADERS FAIL TO SIGNAL NEW STEPS

[The German central bank, the Bundesbank, warned in its monthly report Wednesday that the Greek situation was “extremely worrying,” but that easing Greece’s bailout terms “would damage confidence in all euro-area agreements and treaties and strongly weaken incentives for national reform and consolidation measures.”]

By Nicholas Kulus and Paul Geitner

BERLIN — With Greece’s membership in the euro zone teetering, fears of bank insolvency rising and Europe’s leaders bickering about what to do, the euro crisis is once again intensifying and threatening to undermine fragile growth globally.

At a summit meeting in Brussels on Wednesday, regional leaders failed to signal any significant new steps to stimulate the sputtering regional economy or resolve the competing agendas of President François Hollande of France, who favors stronger action to spur growth, and his German counterpart, Chancellor Angela Merkel, who has opposed aggressive moves to ease the pressure on Europe’s weakest economies.

Yet, the urgency for a solution to the region’s debt crisis, now in its third year, may never have been greater.

With international economic monitors warning that the Continent could slide back into recession, Spain has watched its borrowing costs climb to unsustainable levels, as concerns rise about the country’s weakened banking sector. Fears continue to grow that it will be difficult to avoid a messy divorce between Greece and the euro zone, with still unpredictable consequences for markets and other struggling European economies, including Spain and Italy.

In a conference call held on Monday, finance ministry officials from the euro zone countries were urged to make sure contingency plans were in place for all eventualities, including a Greek exit, one European official involved said.

“You have a debt crisis, a banking crisis and a political crisis. Those are the three crises that are occurring simultaneously,” said Thomas Cooley, economics professor at the New York University Stern School of Business. “Anything that undermines confidence in the financial system is bad, not just for the European financial system but the U.S. financial system as well.”

Problems in Europe pose a threat to President Obama’s re-election plans as well, because a deeper slump there could drag down the United States economy, as happened a year ago. In a recent report, the Organization for Economic Cooperation and Development cited Europe’s potential slump as the leading threat to global growth.

Some European leaders had tried to play down expectations for Wednesday’s meeting, one they said was only a prelude to a formal meeting scheduled for the end of June. “Each of us spoke and put forward our position,” said Ms. Merkel, addressing the discussion of jointly issued debt, known as euro bonds, after the meeting. “François Hollande spoke as he said he would. It was a very differentiated discussion.”

But in an indication of developing fissures, Mr. Hollande, who has been vocal in supporting euro bonds, said before the meeting that “the euro zone must show that it can support Greece.” Rather than suggesting a decisive new approach or finding common solutions, the leaders appear to be increasingly at odds.

In many ways their most important mission may be to quell their own infighting. The demand from France and others for bonds jointly issued by the 17 members of the euro currency union, to pool the borrowing risk, has grown louder, even as the opposition in Germany has grown more rancorous.

German officials said that Ms. Merkel, after arriving, met briefly with Greece’s caretaker prime minister, Panagiotis Pikrammenos. They said Ms. Merkel had told him Germany would do what it could to help Greece, but added as she has many times before that Athens would have to abide by the agreements it made with its lenders.

On June 17, Greece will hold a second round of elections that is being treated as a referendum on the loan agreement, and the date is evolving into a deadline for European leaders to offer some sort of hope to the Greek people. But it is not clear what form that might take.

The German central bank, the Bundesbank, warned in its monthly report Wednesday that the Greek situation was “extremely worrying,” but that easing Greece’s bailout terms “would damage confidence in all euro-area agreements and treaties and strongly weaken incentives for national reform and consolidation measures.”

Instead of euro bonds, less controversial measures, like increased financing for the European Investment Bank, the repurposing of existing European structural funds and even “project bonds” jointly issued for specific undertakings, are likely to be pursued. Spain’s prime minister, Mariano Rajoy, has called for more aggressive action by the European Central Bank.

Mr. Hollande has promised to find a way to generate economic growth not only in France but also for reeling economies like Greece. He has proposed that euro member nations pool their resources to make project bonds available for initiatives intended to promote growth. In the process, he has set himself as an opponent of Ms. Merkel and the austerity policies associated with her stance for fiscal rectitude.

Although the German and French finance ministers praised each other and spoke of their friendly and cooperative relations after their preliminary meeting in Berlin on Monday, the level of frustration in the German capital over Mr. Hollande’s vocal demand for euro bonds has become increasingly evident.

Many economists believe that euro bonds offer the surest way to end the sovereign debt crisis and for European states to restore growth. But in Berlin, many policy makers view them with skepticism, as a way for other countries to tap the creditworthiness of Germany rather than facing up to difficult but necessary economic reforms. “It is clear who wants what from whom,” said Thomas Steffen, a deputy finance minister, in an address on fiscal policy on Wednesday. “A lot of people want something from us.”

While talk has focused on how isolated Ms. Merkel has become in her stance against euro bonds and in favor of pressing deficit cuts, she is far from alone. Many Eastern European countries, which suffered through their own austerity programs to gain entry to the euro zone and are still poorer than Greece, have little sympathy for Athens. And the Austrians, Finns and Dutch have thus far hewed to Ms. Merkel’s line.

“We did not expect a decision tonight,” Mr. Hollande said after the meeting. “There was no conflict, no confrontation between the various countries and some were even more against euro bonds than Ms. Merkel.”

Ms. Merkel said Wednesday that the German Constitution and the European treaties forbade countries from assuming one another’s debts. “Aside from that, I don’t believe that they would make any contribution to boosting growth in the euro zone,” she said.

Mr. Cooley, of New York University, said: “I don’t think we’ll get all the way to the unraveling of the euro system. The way they are approaching solutions to it is the one that’s going to cause the most possible pain and damage to the countries on the periphery.”

Nicholas Kulish reported from Berlin, and Paul Geitner from Brussels. Melissa Eddy contributed reporting from Berlin, David Jolly from Paris, and James Kanter from Brussels.


@ The New York Times

PAKISTAN SAYS U.S. DRONE STRIKE KILLS SUSPECTED MILITANTS

[Earlier this week, Bilawal Bhutto Zardari, the chairman of the ruling Pakistan Peoples Party and the son of President Asif Ali Zardari and the slain former Prime Minister Benazir Bhutto, demanded a halt in drone strikes during a speech in New York.]

By Salman Masood

ISLAMABAD, Pakistan — An American drone struck militant hide-outs in northwestern Pakistan for the second consecutive day on Thursday, despite public calls by the Pakistani government to halt the covert C.I.A. campaign.

Estimates varied on the number of fatalities in Thursday’s strike. Seven to 10 people suspected of being militants were believed to have died, government and locals said.

The drone strikes come at a time when diplomatic relations between the United States and Pakistan have worsened over Pakistan’s refusal to reopen NATO supply lines that were closed down last November. Pakistan has been demanding an American apology over an airstrike that killed 24 Pakistani soldiers. In order to reopen the NATO supply lines, Pakistan’s Parliament has also demanded an end to drone strikes, and the government is seeking a much higher transit fee for each NATO container.

Thursday’s drone strike occurred in Hasso Khe in the Lar Dewar area of North Waziristan, an area considered a redoubt of local and foreign militants. Most of the militants killed in the strike were Uzbek fighters who belonged to the Islamic Movement of Uzbekistan, said local residents who were reached by telephone.

A strike on Wednesday in the village of Datta Khel Kalai, also in North Waziristan, killed four suspected militants, The Associated Press reported, citing Pakistani intelligence officials.

The American drone strikes are immensely unpopular in the country and have caused increasing friction between the two countries. While the United States views the remotely piloted aircraft as vital in the fight against militants, the drones are seen as a breach of national sovereignty that also cause civilian deaths.

Politicians across the Pakistani political spectrum have been unanimous in their criticism of the drone strikes.

Earlier this week, Bilawal Bhutto Zardari, the chairman of the ruling Pakistan Peoples Party and the son of President Asif Ali Zardari and the slain former Prime Minister Benazir Bhutto, demanded a halt in drone strikes during a speech in New York.

“The continuing unilateral U.S. drone attacks on Pakistani soil are a constant irritant to Pakistani public opinion — both as a clear violation of our sovereignty and the toll of collateral damage to innocent victims,” Mr. Zardari said, addressing a gathering of supporters. “I would like the American public to consider what their reaction would have been if American troops had been killed in such an attack on their border with Mexico.”

Political analysts here say that the anti-American public sentiment and the view that drones have caused a high number of civilian casualties forced the government to adopt a tough posture on the strikes, even though some officials previously gave tacit support for the strategy.

Protests against the drones have been more visible in the country’s urban areas though rarely seen in the tribal regions, where local residents acknowledge the drones have forced the militants to flee deeper into the mountains.

“It’s quite obvious that drones are giving the Americans the kind of results they want against the militants,” said Nadeem Farooq Paracha, a columnist for the English language daily Dawn. “Drone strikes fill the gap that Pakistan’s armed forces and government should be filling, but are not.”

Mr. Paracha said that despite the public outcry, it is obvious that drone strikes will continue. “In reaction, there will be lots of the same old rhetoric, very little about the on-ground realities,” he said.

Ihsanullah Tipu Mehsud contributed reporting.

@ The New York Times