The eurozone is preparing to bow to the will of the financial markets as leaders attempt to ease fears ahead of crucial elections in Greece this weekend.
A draft of the text that will be discussed at the European Union summit later this month was leaked, showing national leaders are set to go ahead with a pan-European banking union and closer integration, the two areas where frightened investors have been clamouring for progress.
"There is a need for more specific building blocks centred around a much stronger banking and fiscal integration, underpinned by enhanced euro governance," said the draft, which was obtained by Reuters.
Investors have been pulling money out of banks in struggling eurozone states in recent months, motivated by fears that their deposits could be devalued if the eurozone breaks up. Figures released by the Greek central bank showed total deposits fell by 17 per cent in 2011. There have also been reports of large withdrawals from the Spanish banking system, for which the Madrid government has requested a bailout of up to €100bn.
Senior European policymakers, including the European Commission President, José Manuel Barroso, have suggested that a move to a banking union, with central guarantees of all deposits, will calm investors. The European Central Bank President, Mario Draghi, has also called for such a union.
However, the leak of the draft yesterday failed to make a positive impression. Spanish 10-year borrowing costs rose again, closing at 6.76 per cent. Italy also faced higher borrowing costs. The country had to pay 3.97 per cent to raise €6.5bn, up from 2.34 per cent last month.
Markets were also unsettled by German Finance Minister, Wolfgang Schäuble, who expressed doubts about Athens' ability to stick to the savings programme imposed under the EU's bailout. He was said to have told a meeting of his ruling Christian Democratic Party this week that the "Troika" of EU, European Central Bank and International Monetary Fund officials would soon find out that Greece will not keep to its commitments.
"When the Troika next visits Athens they will see that Greece cannot fulfil the programme," Die Welt newspaper quoted him as saying. He said that no matter who won Sunday's election, Athens would not manage to keep to the conditions. Die Zeit newspaper also said Greece was behind schedule on implementing its savings programme and warned Germany might have to consider a third bailout before summer ends.
Ambassadors will discuss the draft summit text today, ahead of the formal meeting in Brussels on 28-29 June. Mr Barroso has said a banking union could be established next year without any new European treaties being required.
Spanish PM: It's not a bailout, it's a bank credit
So far we've had "credit line", "what happened yesterday", "a help", and "what we should have done three years ago": for the Spanish Prime Minister Mariano Rajoy and his ministers actually using the word "bailout" to describe last Saturday's €100bn "intervention" appears to be beyond them.
Yesterday, in the Spainish parliament, his only description of the bailout was "a credit to be paid by the banks". Later, the leader of the centrist UPyD Party, Rosa Diez, pleaded with Rajoy to "say bailout with me... a light bailout, a limited bailout, a marvellous bailout, a financial bailout..." But he refused to be drawn.