FRESH TENSIONS have emerged in Europe’s drive to settle the sovereign debt debacle next weekend as Germany plays for time in difficult talks on a comprehensive new deal to assert control over the crisis.
Although EU leaders are pushing to reach agreement at a crunch summit next Sunday, Berlin warned twice yesterday there would be no catch-all solution to the emergency.
The backsliding by Germany, which is the dominant power in the euro zone, raised concern in Brussels that the ongoing effort to develop a “grand bargain” plan to root out the crisis may be compromised.
Remarks by finance minister Wolfgang Schäuble and Chancellor Angela Merkel’s spokesman are seen to reflect deep divisions between Germany and France over core elements of the new rescue package.
The non-euro zone countries in the G20 group of the world’s largest economies have implored Europe to deliver a decisive solution to the crisis on Sunday.
In Brussels yesterday EU Commission chief José Manuel Barroso and European Council president Herman Van Rompuy each called for increased action. “There is in fact a need for a more comprehensive response,” said Mr Barroso.
Mr Van Rompuy said the emergent plan was essential to create confidence in the financial sector and weakened countries. He also indicated that EU leaders will make it clear that any move to impose greater losses on Greek bondholders will be unique to that country.
Mr Schäuble has been urging caution, however, saying the summit will not lead to a “definitive solution”.
Dr Merkel’s spokesman, Steffen Seibert, said the search for an end to the crisis would “surely” continue into next year. “The chancellor has pointed out that the dreams building up that this package will mean everything will be solved and over by Monday cannot be fulfilled,” he said.
Such remarks weighed on markets, as the euro slipped and European and US stocks fell. In a further sign of strain, the interest rates at which banks lend to each other in the London and European markets rose.
In spite of repeated claims of unity between Dr Merkel and French president Nicolas Sarkozy, European officials believe the two leaders remain very far apart on new terms for a second Greek bailout and a wider remit for Europe’s rescue fund.
“We need to see if France and Germany come closer together,” said a senior EU official last night.
As talks intensify in the build up to the summit, the official said it was significant that neither Berlin nor Paris was in a position to declare the terms of any joint proposal to confront the disruption.
In nearly two years of crisis in the euro zone, Germany and France have almost always led the way for the other countries that share the single currency. Given the intensity of the effort now under way, a common Franco-German position is a prerequisite for the successful conclusion of the talks at the weekend.
Although Berlin and Paris are said to be in constant contact, there is some concern in Brussels that any failure to achieve common ground might lead to the adoption of piecemeal solutions. This is held to be risky as the authorities in Brussels are working on an integrated package of measures.
The plan would increase the loss borne by private Greek bondholders. To guard against market contagion following such a manoeuvre, the EU Commission has proposed a big recapitalisation of weakened euro zone banks and new powers for the bailout fund to help it support vulnerable countries like Italy and Spain.
According to high-level European officials, Germany and France remain divided on both fronts.
In view of the high exposure of French banks to Greece, Mr Sarkozy is resisting German pressure to impose bigger losses on that country’s investors. Similarly, Dr Merkel is resisting moves to give the bailout fund the power to expand its operations by “leveraging” its assets.
