Despite calls for bolder action to quell the government debt crisis that has been smoldering in the shakier corners of the continent, European leaders for now are counting on stop-gap measures to keep bond market turmoil at bay.
A meeting of European Union heads of state and government Thursday and Friday in Brussels appears set to revolve around the wording of a small change to EU treaties to set up a new crisis mechanism agreed almost two months ago.
Proposals to flash the eurozone's financial might — by increasing the its 750 billion euro ($1 trillion) bailout fund or creating pan-European bonds — have little chance of success after they were rejected by Germany, Europe's biggest economy which has been dictating the currency bloc's strategy in recent months.
"Against this background, it is hard to imagine that the EU summit could deliver important conclusions," analysts at ING wrote in a note.
Instead, Europe's policy makers are working to fight the crisis with smaller, localized attacks.
In Berlin, a German government official said Tuesday his country would be willing to boost the European Central Bank's capital base — a move that would allow the ECB to buy more government bonds and thereby support governments with shaky finances.
Portugal's finance minister, meanwhile, boasted China's commitment to invest in its debt issues as a sign that Lisbon can master the current market turmoil without following Greece and Ireland in seeking an international bailout.
And Spain sold 2.5 billion euros ($3.3 billion) in treasury bills to help refinance is debt load, accepting much higher interest rates than only a month ago.
But even though markets have calmed down in recent weeks, many economists warn that such stopgap measures will only buy European leaders time. What is necessary, they say, is to target the crisis at its roots, where undercapitalized banks, mounting borrowing costs and weak economic growth are making some countries' debt burdens look increasingly unsustainable.
"Just passing the bucket around between the financial sector, governments and the ECB will not empty the bucket," the ING analysts said.
In his most open call for further action yet, ECB President Jean-Claude Trichet Monday night said eurozone nations needed to boost their portion of the region's financial backstop, the 440 billion euro European Financial Stability Facility.
"On the EFSF I can say we are calling for maximum flexibility and I would say maximum capacity quantitatively and qualitatively," Trichet told journalists in Frankfurt.
The ECB has been reluctant to play a more active role in resolving the debt crisis, saying it was ultimately up to politicians to get their fiscal houses in order.
In contrast to the U.S. Federal Reserve and the Bank of England, which have been ready to flush their economies with cash to spur growth, the ECB's government bond buying program has been rather modest. The billions of euros the central bank has invested in the bonds of vulnerable governments such as Greece, Ireland or Portugal in recent months have nevertheless strained its balance sheet. If those bonds were to fall further in value, it could quickly diminish the ECB's capital base.
Trichet might bring up the issue of a capital increase for the ECB at his dinner with EU leaders on Thursday, the German government official said. "If there was such a request, we would assess it positively," he added.
The official was speaking on condition of anonymity because he wasn't authorized to comment publicly on the issue.
The final meeting of the ECB's monetary policy committee for this year is also on Thursday. A spokeswoman for the central bank declined to comment on whether the bank's board was discussing a capital increase.
Should the ECB seek a capital injection, it would be the first time the Frankfurt-based bank asks for more money in its almost 12-year history. Through their central banks, all 16 countries that use the euro are shareholders in the ECB, and Germany, as the eurozone's largest economy, has the biggest stake.
Since May, in the wake of the 110 billion euro bailout for Greece, the ECB has bought about 72 billion euros in vulnerable government bonds to support their prices and stabilize countries' borrowing costs.
In addition to the debt the ECB has been buying directly on secondary markets, it holds many more bonds issued by countries such as Greece, Ireland or Portugal that banks have deposited as collateral in return for supplying them with unlimited liquidity.
In November, Goldman Sachs estimated that the ECB has already purchased around 17 percent of the combined debt stock of Greece, Ireland and Portugal.
The value of bonds by these countries has fallen sharply after EU leaders at their last summit in late October agreed to set up their longer-term defense against crises: a new mechanism that could imposed losses on private creditors if a country's debt has become unsustainable.
Even though European officials have emphasized that the new mechanism would only come into force in 2013 and wouldn't apply to existing debts, it has been blamed for raising borrowing costs and driving Ireland into a euro67.5 billion bailout last month.
Germany had pushed for the new tool, saying that taxpayers should not have to shoulder the cost of future bailouts alone. To create a legal basis for this mechanism, it is necessary to change EU treaties.
At their meeting on Thursday and Friday, EU leaders are expected to haggle over, but ultimately sign off on, an extra paragraph that would allow eurozone governments to set up a mechanism to deal with crises endangering the eurozone as a whole.
Germany's Foreign Minister Guido Westerwelle said Tuesday that governments were close to agreeing on the wording of that paragraph, but that Berlin wanted to make sure it said financial aid would only be given as a last resort and that any support would have to be agreed unanimously.
In a sign that the eurozone's debt troubles aren't confined to the so-called periphery, rating agency Standard & Poor's warned Tuesday that Belgium — the seat of the EU — may have its credit rating downgraded within six months in light of the country's ongoing political deadlock.
Belgium has effectively been without a government since June after an inconclusive election was followed by an inability of the parties to forge a consensus across the country's linguistic divide.
Belgium's debt is estimated to reach 98.6 percent of economic output this year, the third highest in the eurozone after Greece and Italy.
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