A French-German split over Europe's rescue strategy emerged as finance ministers prepare to meet in Brussels tomorrow under pressure to craft a solution to the region's debt crisis.
With only three days remaining before EU leaders gather in Brussels to agree a major rescue plan for stricken euro zone countries, the talks have stalled.
Discussions between the European powers are deadlocked on many of the main elements of the package, said EU officials and diplomats.
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.
French president Nicolas Sarkozy, whose wife Carla Bruni was reportedly giving birth to his first daughter, jetted into Frankfurt to meet with officials as they attended an event to honor outgoing ECB president Jean-Claude Trichet.
Mr Sarkozy, German chancellor Angela Merkel and International Monetary Fund managing director Christine Lagarde left the event at the Frankfurt Opera House without commenting.
Dr Merkel and Mr Sarkozy are at odds over the second Greek rescue and a fresh overhaul of Europe’s bailout fund. There was little expectation of any breakthrough overnight.
French and European officials have played down the rift, however, saying ample time remained to reach a deal. The division complicates the challenge facing EU leaders as they try to settle on a package acceptable to all players in the affair.
There remains concern in European circles that Germany might not be prepared to yield to pressure for a comprehensive deal at the weekend.
Dozens of officials from European governments and several EU institutions are involved in the negotiation, which one informed source described as “highly complex and chaotic”. In a further sign of strain, Spain is heavily resisting pressure to recapitalise its banks. The country’s credit rating was downgraded by Moody’s yesterday, a day after it warned France that its triple-A rating could come under pressure.
In addition, international banks who hold Greek debt are pushing back forcefully against moves to impose big losses on their investment.
Talks have restarted between euro zone officials and the Institute of International Finance, the global banking lobby, which has vowed to resist the drive to increase banking losses in the new Greek bailout.
As other major economies tried to pressure European leaders to get a deal done, Canada's finance minister Jim Flaherty called the slow progress "disconcerting" and the head of the World Bank urged policymakers to take "definite steps."
A report expected today from the EU-IMF-ECB troika on Greece’s debt sustainability is expected to call for an increase in bondholder losses to 50 per cent, more than twice the 21 per cent agreed when EU leaders struck an agreement in July to rescue Greece for a second time.
This has raised fear in Paris about the consequent losses faced by big French banks, whose shares have come under heavy pressure in recent weeks.
Mr Sarkozy’s visit to Frankfurt came as EU leaders gathered in the German city to pay tribute to outgoing European Central Bank chief Jean-Claude Trichet, who retires at the end of the month.
While Mr Sarkozy has warned that the survival of the euro was at stake in the talks, Dr Merkel emphasised a sense of caution in the talks when she addressed the gathering of senior European figures in Frankfurt’s opera house. “It won’t be the final point where we regain the confidence of others, but it will be a stepping stone, a marker on the road,” she said.
Present in the room was European Council president Herman Van Rompuy, who chairs the summit on Sunday, and many other participants in the talks. Mr Van Rompuy said in a letter to EU leaders that they faced “daunting’ challenges. “We can only overcome them if we act jointly and decisively,” he said.European diplomats said there was anxiety among many euro zone countries that the package would not go far enough to restore confidence.
Of particular concern is the growing expectation that the firepower of Europe’s bailout fund may not be increased beyond €1 trillion, half the sum deemed necessary in many countries to fully confront the crisis.
