French-German Split May Spell Doom For EU Summit


Divisions between France and Germany over Europe’s rescue strategy means the eurozone will make scant progress over the strengthening of the European Financial Stability Facility at the EU Summit scheduled to take place this Sunday.

Europe's efforts to deliver a comprehensive plan to resolve the euro-zone debt crisis were in danger of unraveling Thursday as disagreement between Germany and France over virtually every point forced the 27-nation bloc to concede a much-anticipated summit of European Union leaders on Sunday won't produce an agreement.

With a summit of European leaders scheduled for two days later, a disagreement over the European Central Bank’s role in the rescue plan threatens to stymie progress on the banking and economic questions needed to deliver the comprehensive strategy demanded by global policy makers.

Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro-area finance ministers, indicated an impromptu meeting of European leaders in Frankfurt last night failed to resolve differences.

We are still meeting, he said as he departed.

The major point of contention is how to scale up the European Financial Stability Facility (EFSF), a €440 billion (US$605 billion) fund so far used to bail out Portugal and Ireland.

France and Germany disagree over the best way to bolster the facility, with Paris fearing its triple-A credit rating could come under threat if the wrong method is chosen.

Failure to agree on leveraging the EFSF will further damage confidence in the euro zone's ability to tackle its debt crisis after nearly two years of trying to get on top of a problem that started in Greece and now threatens Italy, Spain and even France.

In their effort to agree a comprehensive resolution plan, euro zone leaders are striving to agree new steps to reduce Greece's debt, strengthen the capital of banks exposed to weak sovereign debt and leverage the EFSF to stem contagion to bigger economies.

Despite the divisions on the EFSF, EU leaders have made headway on another critical element in tackling the crisis – the recapitalisation of European banks – while a draft statement for Sunday's summit showed euro zone countries will make rules to limit budget deficits and public debt part of national legislation by the end of next year.

EU officials said all 27 member states had agreed that just short of 100 billion euros was required to bolster bank balance sheets, a substantial step forward in attempts to protect the system against the threat of a default in Greece or elsewhere.

Underlining the threat the euro zone crisis poses to the broader global economy, US President Barack Obama held a video conference with German Chancellor Angela Merkel and French President Nicolas Sarkozy, reiterating that he hopes a solution will be in place in time for a summit of G20 leaders in France on Nov 3-4.

Merkel and Sarkozy "fully understand the urgency of the issues in the euro zone and are working diligently to develop a comprehensive solution that addresses the challenge and which will be politically sustainable," the White House said.

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