As ever, the focus is on Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, who have made a habit of cobbling together deals to present to their European Union colleagues. But forging an agreement now is harder than before, as Paris and Berlin face core differences over how to maximize the euro zone’s financial rescue fund and how far the European Central Bank should intervene in the bond markets, either on its own or through the bailout fund.
Already the two leaders have announced that Sunday’s summit meeting, which had already been delayed to allow more time for negotiations, would be followed by another summit meeting as early as Wednesday. That announcement, paradoxically, seemed to buoy stock and bond markets, apparently because the Europeans at least appeared to be focusing intensely on resolving the crisis.
But the delay may have been because Mr. Sarkozy needs pressure from other nations to bring Mrs. Merkel around to a more flexible position on how to use the bailout fund, called the European Financial Stability Facility, and the central bank.
Mr. Sarkozy has now rushed twice to Germany for talks with Mrs. Merkel, the last time on Wednesday, as his wife was giving birth, to press for a deal. The meeting was testy, said German officials, who have complained that France is “not budging an inch.” Mr. Sarkozy, clearly the supplicant in the relationship, speaks openly of a “European rendezvous with history,” while Mrs. Merkel keeps repeating that “there is no magic wand” and that a long-term solution will take time.
Jean-Claude Juncker, who also leads the meetings of euro zone finance ministers, said that Thursday’s move to delay final decisions until the second summit meeting Wednesday looked “disastrous” to the outside world. He canceled a news conference scheduled for after Friday’s meeting of the finance ministers of the 17 countries that use the euro, suggesting that no breakthrough was imminent.
The “Franco-German couple” has been vital to each of the agreements reached by the European Union during this two-year crisis. But so far none of the deals have been sufficient to solve even the problem of Greek indebtedness, which is growing worse in an austerity-driven recession, let alone the problem of contagion spreading now to Italy and Spain. Nor has there been an agreement yet on how much capital needs to be injected into European banks so that they can reassure investors that they will remain solvent even as the sovereign debt of Greece, Italy, Spain and other hard-hit countries loses value.
These are the main issues on the agenda.
On Greece, Germany appears willing for a deal to restructure Greek debt to no more than half of its face value, to try to bring Greece’s debt burden to a sustainable level. But Germany wants private investors and banks to accept such losses voluntarily to avoid a formal default, which would be a first for the euro zone.
Big European banks had already agreed to what was billed as a 21 percent reduction in the value of their Greek debt in July, a deal not yet implemented, and they are reluctant to reopen the matter. Nor are they confident that enough private bondholders would agree to such a large cut.
France and the European Central Bank do not want to restructure Greek debt further, fearing market contagion and, for Paris, additional pressure on French banks that hold significant amounts of Greek, Spanish and Italian debt. A major recapitalization of French banks would put more strain on France’s budget and require new cuts elsewhere to meet deficit targets, and could thus jeopardize France’s coveted AAA credit rating. That would be bad politics with elections six months away and Mr. Sarkozy already unpopular.
There is also a fear that banks would cut back on lending rather than try to raise more capital while their stock prices are down, which could lead to a new credit crunch at a time when the entire euro zone is on the brink of a new recession.
France wants Europe to collaborate on recapitalizing banks, ideally by turning the bailout fund into a bank, which could then draw on loans from the European Central Bank, which has the authority to print euros as needed.
But Germany and the central bank itself have resisted that option. “The path is closed for using the E.C.B. to ease liquidity problems,” Mrs. Merkel told her parliamentary caucus in Berlin on Friday, Reuters reported.
Mrs. Merkel wants each country to be responsible for injecting funds into its own banks, and only then turn to the regional bailout fund in an emergency. Politically, it is easier for her to explain to Germans that German money is being used to recapitalize German banks than to concede that it is going to everybody’s banks. Mrs. Merkel is also compelled by German law to seek a mandate from Parliament’s budget committee before committing new funds. Mr. Sarkozy does not face such restrictions.
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