Eurozone faces pivotal month

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(MoneyWatch) After the usual August lull, European Union leaders are heading into a month that could prove decisive for the region's economic future.

European Central Bank President Mario Draghi on September 6 is expected to specify what actions the lender will take to protect troubled Italy and Spain, which as the third- and fourth-largest economies, respectively, in the eurozone represent the front-line in the battle to halt the currency union's festering debt crisis. Although the ECB has not offered details about the plan, it is expected to consist of a bond-buying program aimed at containing the countries' borrowing costs and keeping their debt burdens at a tolerable level.

For now, the plan is believed to be far from complete, and its backers will have to overcome significant political obstacles. It faces what appears to be hardening opposition in Germany, including from Chancellor Angela Merkel and Bundesbank president Jens Weidmann. Officials in Finland, Holland and several other eurozone countries also have panned the proposal, although most members of the 17-member bloc support it.

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At a summit in Berlin this month, Merkel and Italian Prime Minister Mario Monti publicly clashed over the idea of the ECB purchases of Italian and Spanish debt, with Merkel saying the plan is "incompatible" with EU treaties. Although she claimed to have support from Draghi on this point, her claim was undercut when he said in a column published in a German newspaper that the ECB would need "exceptional measures" to curb the crisis and that Berlin's interpretation of the bank's mandate was too narrow.

On September 12, a week after Draghi's expected announcement, Holland will hold national elections expected to provide a gauge of Dutch sentiment on the plan to aid Italy and Spain. That same day, a German constitutional court is slated to rule on whether a move to create a proposed bailout agency -- the European Stability Mechanism -- must first be put before the nation's voters.

Next month will also see the release of a report on Greece's economic reforms by the so-called "troika" -- the ECB, European Commission and International Monetary Fund. Many expect that report to conclude that Athens is unlikely to meet it fiscal targets, which would deepen questions about its continuing participation in the eurozone. Missing those targets would technically make the country ineligible for additional bailout funds. The Greek government has said that without that aid, it will run out money by the middle of October and default on its debt.

A long-delayed independent report into the condition of Spain's banks is also supposed to be released next month. In addition, September will see a huge number of European sovereign bond auctions.The Wall Street Journal estimates that eurozone nations will try to sell $112.9 billion in bonds. That would represent the second-largest debt total raised in a single month this year, only slightly behind January's total of $129.2 billion. Eurozone members must sell $329.9 billion of bonds by year's end, nearly a third of the year's total of $991 billion in bond sales.

August has been a quiet month on the European financial markets for several reasons, including low bond issuance and subdued trading volume owing to the summer holidays. Yet while Italy and Spain have both seen significant drops in their bond prices this month, in the last week they have started to drift higher as Europe gears up for what is shaping up as a critical stretch.

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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