CRAMMED INTO Frankfurt’s old opera house to bid farewell to outgoing European Central Bank president Jean-Claude Trichet, the most senior figures in the EU leadership played hardball last night in increasingly fraught talks to finally nail the debt crisis.
Time is fast running out before a crunch summit in Brussels on Sunday. But high-level diplomats and officials say Europe remains deadlocked over the most crucial elements of the new rescue package.
There is growing concern, they warn, that the eventual deal might fall flat. Although this happened many times before, expectations this time around are at fever pitch.
German chancellor Angela Merkel is pushing in the opposite direction. As praise was showered on Mr Trichet, she went out of her way to play down the summit.
“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,” Dr Merkel said.
“All of the sins of omission and commission of the past cannot be undone by waving a magic wand.”
This is in keeping with Germany’s deliberately downbeat approach to the current talks, which is sparking no end of friction with France. As tension between the two allies escalates, French president Nicolas Sarkozy sped to Frankfurt last night in an attempt to narrow the gap. It was a dramatic manoeuvre. His wife, Carla Bruni Sarkozy, was in a Paris maternity clinic where she gave birth to a girl, the couple’s first child.
Virtually all the key power brokers in the debt debacle turned out to pay tribute to Mr Trichet, meaning the occasion offered a significant opportunity to take stock of the situation.
Present in the room were: European Council president Herman van Rompuy; International Monetary Fund managing director Christine Lagarde; euro group president and Luxembourg premier Jean-Claude Juncker; European Commission president José Manuel Barroso; economics commissioner Olli Rehn; incoming European Central Bank president Mario Draghi and a good clutch of others.
For Mr Trichet, it was a glittering night to cap eight gruelling years at the helm of the ECB. Looming over everything, however, was the spectre of a deepening Franco-German schism with only three days left to summit time. No breakthrough was expected overnight. At this point in the game, there is ample time to heal the rift between Dr Merkel and Mr Sarkozy. However, it has potential to turn serious.
In spite of their insistent protests of unity, the German and French leaders remain deeply at odds over the extent of losses to be borne by bondholders in the second Greek bailout, the deployment of Europe’s bailout fund to recapitalise banks and the expansion of the fund itself.
It is on these three pillars that Europe’s new grand plan rests, but the foundation stones are not yet in place.
Although the alignment of Berlin and Paris is a prerequisite for progress in the debt debacle, there’s no sign of that so far. Dr Merkel wants bigger bondholder losses, something Mr Sarkozy fears because of consequent losses in French banks. He wants to use the bailout fund to strengthen French banks; she doesn’t.
Yet the non-stop clamour from Mr Sarkozy has raised the stakes in a big way, suggesting a heightened sense of concern in France. Its cherished triple-A credit rating is under threat and its banks are under siege.
Similarly, Dr Merkel’s studied reluctance to rush to a decision smacks of a negotiating ploy to ensure Berlin does not overextend itself in the final fray.
She is under pressure to increase the bailout fund’s firepower to €2 trillion, but European diplomats say €1 trillion is the more likely outcome. There is no little concern among talks participants that that won’t be enough to becalm the markets. Few involved expect anything other than a decisive attempt to produce a comprehensive plan this weekend.
Nevertheless, a senior EU official said it remained possible that the German leader would decide it was not in her interest to go the distance on Sunday. This helps explain the sense of apprehension around Brussels.
The great irony here, of course, is that the negotiation is not confined to the duo known in European circles as “Merkozy”. Far from it. Diplomats and officials from around Europe are locked in frantic parallel talks to prepare the summit. The phone lines have been busy for weeks but a deal remains elusive.
