May 19, 2022

French Appear Ready to Soften Law on Media Piracy

In 2009, French lawmakers, aiming to curb unauthorized file-sharing and to slow the erosion of media industry revenue, approved what was billed as the toughest anti-piracy law in the world. Repeat offenders who ignored two warnings to quit downloading movies or music illegally were confronted with the prospect of a suspension of their Internet connection. The system was emulated in several other countries, including the United States, though generally with softer penalties.

But now the government of President François Hollande appears poised to shut down the agency that was created to enforce the law, imposed under Mr. Hollande’s predecessor, Nicolas Sarkozy, and to defang the measure of much of its menace.

Fleur Pellerin, the French minister in charge of Internet policy, said during a recent visit to a high-technology complex in Sweden that suspending Internet connections was incompatible with the French government’s hopes of spurring growth in the digital economy.

“Today, it’s not possible to cut off Internet access,” she said. “It’s something like cutting off water.”

A report on digital policy that was prepared for the government by Pierre Lescure, the former president of the pay-television company Canal Plus, in April recommended dropping the threat of disconnections and replacing it with a fine of €60, or $78, for repeat offenders. The report also recommended disbanding the enforcement agency, known by its French acronym, Hadopi, and subsuming some of its functions in the French media regulator, Conseil supérieur de l’ audiovisuel.

While government ministers have voiced support for Mr. Lescure’s recommendations, some lawmakers, including Patrick Bloche, an influential Socialist deputy, have suggested that the administration should go further and simply scrap the entire system of warnings and potential penalties.

Despite all the debate that the system has prompted, in and outside France, evidence of its effects remains skimpy. A study by researchers at Wellesley College near Boston and Carnegie Mellon University in Pittsburgh that was published last year showed that the threat of disconnection was directing more French Internet users toward Apple’s iTunes store, a licensed source of digital music. Separate studies, commissioned by Hadopi, have shown a decline in illegal file sharing.

Yet the French music business remains deeply troubled. SNEP, a French recording company group, said Friday that industry revenue fell by 6.7 percent in the first quarter of the year. More alarmingly, revenue from digital outlets fell by 5.2 percent — the first quarterly decline — though the organization said several special factors played a role in this.

Meanwhile, SNEP said the number of visits to illegal music sites by French Internet users had risen by 7 percent between January 2010 and January 2013, to 10.7 million.

Guillaume Leblanc, director general of SNEP, said the group was willing to accept dropping the threat of disconnection, as long as the warning system was preserved, but said the proposed €60 fine was too low.

“Maintaining graduated response is essential for the music industry,” he said. “For the legal offer to keep developing, it’s important to have strong copyright protection on the Internet.”

While Hadopi has sent out hundreds of thousands of warnings to those suspected of being pirates, only a handful of cases have reached the third and supposedly final stage. Several of these were thrown out by the courts; others resulted in fines or suspended sentences.

“If you cannot chop off a few heads as an example, then the chopping machine inspires less fear,” said Jérémie Zimmermann, spokesman for La Quadrature du Net, a group that has campaigned against the law.

Supporters of the law say cutting off large numbers of Internet connections was never the point.

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Inside Europe: Rebalancing the French-German Partnership

PARIS — A chill has settled over the Rhine seven months after the election of François Hollande as president of France, reshuffling the cards in Europe’s perpetual power game.

The cooling of traditionally close French-German relations is partly an intentional step by Mr. Hollande, a Socialist, to demonstrate that he is not in the pocket of the conservative German chancellor, Angela Merkel, but instead wants to change the policy direction of the European Union.

It also reflects a fraught process of rebalancing power to accommodate Germany’s greater political heft and economic clout.

Despite vows of ever-closer cooperation that are sure to mark the 50th anniversary next month of the treaty that sealed postwar French-German reconciliation, tension is likely to simmer at least until the next German general election, scheduled for September.

Mr. Hollande was eager to distance himself from the exclusive alliance his conservative predecessor, Nicolas Sarkozy, had with Ms. Merkel, a partnership that became known as Merkozy because of the dominant role the two played in steering the response to the sovereign debt crisis in the euro zone.

Mr. Hollande and Ms. Merkel have differed publicly over the right mix of austerity and growth policies, the future of the euro zone, a European banking union and industrial policy. A series of disputes over common euro zone bonds, the E.U. budget and the aerospace industry have exposed mutual distrust between German and French officials and business leaders, despite entrenched habits of cooperation.

“It’s not an easy dialogue,” said Bruno Le Roux, head of Socialist lawmakers in the French Parliament. “It was on the wrong track for the last couple of years, and the fact that France was in an electoral cycle for a year, and now Germany is in an electoral cycle for a year, doesn’t help.”

Mr. Le Roux, who is close to Mr. Hollande, said that the president had set out to broaden the debate about changing the course of the euro zone by including countries like Italy and Spain that are closer to his approach of “integration with solidarity.”

That had led Ms. Merkel to build bridges with Britain on issues like the E.U. budget, at France’s expense. In the Union’s previous long-term budget, France and Germany cut a deal to preserve the level of E.U. agricultural subsidies — of which the French are the chief beneficiaries. This time around, Berlin gave the cold shoulder to approaches by Paris for a similar pact. In aborted negotiations last month on the 2014-20 budget, Ms. Merkel endorsed lower farm spending despite French pleas. She also backed Britain in its push for deeper cuts in total E.U. expenditure.

Ms. Merkel has expressed public concern about France’s loss of competitiveness. Her finance minister, Wolfgang Schäuble, last month asked a panel of advisers to make economic proposals for France.

In private, senior German officials worry about Mr. Hollande’s ability to secure support in the Socialist Party for the bold shake-up of labor markets, welfare financing and public spending that experts say France needs after the anti-business rhetoric of his election campaign.

Berlin has watched, aghast, a national drama in France over efforts to save 630 jobs at an ArcelorMittal steel plant, including threats to nationalize an aging plant that was shuttered because of chronic overcapacity in the sector. In German eyes, the furor over the Florange plant epitomizes a lack of economic realism and a reflex for state intervention that run counter to business culture in Germany.

Policy makers in Berlin see Mr. Hollande making a gradual turn toward economic reform, but they have yet to be convinced of his determination to stay the course if resistance grows from the left and trade unions.

French-German tensions over power sharing, industrial policy and the role of the state came to a head in the struggle over European Aeronautic Defense Space. Last month, Berlin prevented a merger between EADS, the parent of Airbus, and the British contractor BAE Systems, fearing that Germany would be overruled by French-British military interests.

Germany then demanded a stake in EADS equal to that held by the French. The result was a shake-up at EADS in which Berlin paid more than $2 billion to buy a stake matching that of France, only to see the role of state shareholders greatly reduced by new governance arrangements at EADS.

The Germans are “obsessed with parity because they are convinced the French want to take over the company, just as the French are convinced the Germans want to take it over,” said a person involved in the negotiations, who spoke on the condition of anonymity.

Germany is no longer willing to sign the checks while letting France take the lead in Europe, as it did in the past to atone for World War II or to ease the way for German unification.

EADS is a paradigm for wider difficulties in relations, because of the mutual suspicion and because of Berlin’s determination to assert its increased power in a venture in which the French previously had the upper hand.

Mr. Hollande argues that each step toward integration in the euro zone should be preceded by an increase in “solidarity” — code for Germany’s doing more to support the weaker southern states. In contrast, Ms. Merkel insists that there must be greater central control of national budgetary and economic policies to ensure they respect E.U. rules before any sharing of liabilities.

Mr. Hollande advocates common euro zone bonds to help pay off those countries’ accumulated debts. He also wants joint deposit insurance in which German depositors and taxpayers would underwrite shaky banks in other euro zone states. Both ideas are anathema in Germany, at least this side of the election and probably for much longer.

Annoyed by Mr. Hollande’s perceived attempts to isolate her, Ms. Merkel has reached out to other partners to strengthen her hand in European negotiations. In an essay titled “After Merkozy, how France and Germany can make Europe work,” Ulrike Guérot and Thomas Klau of the European Council on Foreign Relations recount how Berlin lines up support from the Dutch and Finns — fellow north European AAA-rated nations — before dealing with the French.

“We call the French only once we have established a common position among our group of like-minded countries,” they quoted a German official involved in financial negotiations as saying. “Once we start speaking with the French, then the trouble starts.”

Paul Taylor is a Reuters correspondent.

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Ireland Said to Face Downturn in 2nd Year of Austerity

Ireland cut its deficit to about 10 percent of gross domestic product in 2011 from 32 percent in 2010, the year that a government plan to bail out six of the country’s largest banks inflated the deficit, according to the report by the European Commission, the European Central Bank and the International Monetary Fund.

The Irish economy will grow only about 0.5 percent this year, down from a forecast of 1.1 percent just two months ago, as the country’s troubles keep unemployment high and prompt Irish consumers to tighten their purse strings, the report said.

But the reduction in the deficit is striking, and Irish officials hope it will persuade investors that Ireland is once again becoming creditworthy enough to borrow in financial markets as soon as next year at interest rates the country can afford.

Ireland had to take a bailout of 67.5 billion euros (about $87 billion) from international lenders in November 2010 after investors, fearful of the country’s deteriorating finances, drove borrowing costs above 8 percent, about the same levels that led Greece to take a bailout a few months earlier. By contrast, Ireland is paying only 3.3 percent on the bailout money it receives.

Michael Noonan, Ireland’s finance minister, struck an upbeat tone, saying in a statement that the report “illustrates the ability of the Irish state to implement a challenging program effectively.”

The report was issued as European leaders, like Mario Monti, Italy’s new prime minister, and President Nicolas Sarkozy of France are starting to argue that austerity alone is not an answer to Europe’s financial problems.

While the financial markets had an outsize influence in pressuring European leaders to embrace austerity as a way out of the sovereign debt crisis, there has since been a shift in sentiment. Now, investors are increasingly worried that too much austerity is hampering growth, creating a vicious cycle that will make it harder, rather than easier, for Ireland and other weak euro zone countries to pay down their debts and deficits.

This week, Mr. Sarkozy met with French unions and business representatives to discuss how to improve the country’s competitiveness, increase growth and create jobs. In Spain, the new government is forging ahead in changes to labor laws, including trying to reduce wages, in a bid to bring investors back.

Mr. Monti recently told Chancellor Angela Merkel of Germany that if the Italian government were restrained from stoking growth, Italians could soon march in greater numbers in the streets against a multibillion-euro austerity plan that Germany and others want the country to embrace in a bid to avoid Ireland’s fate.

Ireland has been held up by Germany and other European countries as a model of how to tackle austerity. The country had a small growth spurt last year after three years of contraction, largely because of a surge in exports from pharmaceutical companies, which have a strong base in the country because of a low corporate tax rate of 12.5 percent.

But the rise in exports was not accompanied by huge numbers of new jobs. And a worsening economic environment in Europe — the region is expected this year to experience its second recession in three years — is likely to slow the pace of Irish exports.

Despite the progress in reducing its deficit, “Ireland nonetheless faces considerable challenges,” the report from international lenders said.

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Cameron to Address British Parliament Over Veto on Europe Treaty

“I responded in good faith,” Mr. Cameron said in the televised speech, explaining his actions last week. “We were simply asking for a level playing field.”

Reiterating his reasons for the veto decision, Mr. Cameron said he could not agree to the changes because they would have threatened the competitive future of London’s financial services industry, a critical part of Britain’s economy. He also said he had done nothing to compromise Britain’s membership in the European Union itself.

“Britain remains a full member of the E.U. and the events of the last week do nothing to change that,” Mr. Cameron said. “Our membership of the EU is vital to our national interest. We are a trading nation and we need the single market for trade, investment and jobs.”

The British prime minister, leader of the Conservatives, is facing a rift with Nick Clegg, the leader of the Liberal Democrats, the junior coalition partner in Mr. Cameron’s government, who told the BBC on Sunday that Mr. Cameron’s decision to reject the proposed European treaty changes had left Britain in danger of being “isolated and marginalized” in Europe. Mr. Clegg added that if he had been in charge, “of course things would have been different.”

Mr. Cameron deployed his power of veto at a European Union summit meeting in Brussels after failing to secure what he called vital safeguards for the health of London’s financial sector. But with the 26 other members of the European Union either agreeing to the proposed plan outright or saying they would put the matter before their Parliaments, Mr. Cameron’s action on Friday left Britain alone on the margins at a time of great upheaval on the Continent, with the European Union struggling to resolve its financial crisis.

In an unusually blunt acknowledgment of the divide, President Nicolas Sarkozy of France said in a newspaper interview published on Monday that, while he and Chancellor Angela Merkel of Germany had done “everything in order that the English should be part of the agreement” at the Brussels summit, the reality was that “henceforth there are clearly two Europes — one seeking greater solidarity and regulation, and the other attached to the exclusive logic of the single market.”

“You have to understand this is the birth of a different Europe — the Europe of the euro zone, in which the watchwords will be the convergence of economies, budget rules and fiscal policy, a Europe where we are going to work together on reforms enabling all our countries to be more competitive without renouncing our social model,” he told the newspaper Le Monde.

But Mr. Sarkozy also referred to a broader relationship with Britain, despite the ever closer ties between Paris and Berlin in addressing the crisis in the euro zone, of which Britain is not a member.

“Does the importance of the understanding with Germany mean that there is nothing to be done with London? No,” he said. “We intervened in Libya with the United Kingdom and the prime minister, David Cameron, was courageous. With London we share an attachment to nuclear energy and a strong cooperation in defense.”

He also rejected an interviewer’s suggestion that Britain should leave the European Union’s single market — a vast trade zone stretching from Ireland to Scandinavia, the Balkans and the Mediterranean. “We need Great Britain,” Mr. Sarkozy said.

The developments in Brussels brought less ambiguous criticism from Britain’s opposition Labour Party.

“This is the first veto in history not to stop something,” David Miliband, a former Labour foreign secretary told the BBC on Monday. “The plans are going right ahead. It was a phantom veto against a phantom threat.”

“David Cameron didn’t actually stop anything because the other 26 are going on and the provisions of the treaty would not have weakened our rights and freedoms one iota,” Mr. Miliband said.

The Labour opposition was intent on echoing those complaints in Parliament, seeking to dent the enthusiasm of the dominant Conservatives and to highlight divisions within the governing coalition.

Many euroskeptic Conservatives, who want Britain to renegotiate its relationship with the European Union, were hailing the outcome of the Brussels summit as a victory. But several officials suggested that both the Conservatives and the more pro-European Liberal Democrats wanted to avoid a widening of the rift between them.

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Markets End Lower Ahead of European Summit

Stocks fell sharply on Wall Street on Thursday after the European Central Bank appeared to dampen expectations for an expanded bond-buying program and as leaders gathered for a summmit meeting in Brussels aimed at resolving the sovereign debt crisis in Europe.

The E.C.B cut its benchmark interest rate for the second month in a row and expanded the emergency funding it provides to cash-starved banks.

But Mario Draghi, president of the central bank, indicated in a news conference that he was cautious about future bond purchases. Yields on Italian and Spanish bonds rose sharply after his remarks and stocks declined in Europe and then on Wall Street.

Analysts said that investors appeared to be disappointed by M. Draghi’s remarks, in which he said he was “surprised” his recent comments were seen as a sign that the E.C.B. would buy more bonds if political leaders delivered tougher rules on budgetary discipline.

Anthony Valeri, an investment strategist in fixed income at LPL Financial, said that Mr. Draghi was “keeping his powder dry for when he really needs it.”

“It puts more pressure on the summit to deliver something tangible,” said Mr. Valeri.

While markets traded lower for most of the day, the decline accelerated at the end of the session. At 4 p.m., the Dow Jones industrial average was down 1.6 percent after a 0.4 percent rise on Wednesday. The Standard Poor’s 500-stock index slipped 2.1 percent, and the Nasdaq composite index was down 2 percent. Financial stocks fell the most, down nearly 4 percent.

European stocks closed even lower, with the Euro Stoxx 50 down 2.4 percent.

At their two-day summit meeting, European leaders are expected to consider proposals for tougher fiscal rules from the German chancellor, Angela Merkel, and President Nicolas Sarkozy of France. The leaders were gathered for a dinner on Thursday before the main part of their agenda on Friday.

José Manuel Barroso, the president of the European Commission, sought to instill confidence that a solution would be found, saying early Thursday: “I believe this is possible,” according to The Associated Press.

“My appeal — my strong appeal — to all the heads of state and government is to show this commitment to our common currency,” Mr. Barroso said. “I think this is indispensable, and leadership is about making possible what is indispensable.”

Mr. Barroso was in Marseille along with Mr. Sarkozy and Mrs. Merkel for a meeting of the European People’s Party, the conservative bloc in the European Parliament, before their departure for Brussels.

Laura LaRosa, the director of fixed income for Glenmede, said that United States Treasury prices rebounded as investors’ appetite returned for assets seen as safer. On 10-year Treasuries, the yield, which moves opposite to the price, was at 1.969percent, down 6 basis points.

“I think what you are going to see tomorrow is going to be another day where there is a tremendous amount of anticipation,” she said.

Tim Courtney, chief investment officer of Burns Advisory Group, said that with the euro zone debt crisis a concern for investors for some time, expectations for a solution were already low and priced in to the markets.

Late Wednesday, Standard Poor’s said that it was putting the credit ratings of the entire 27-nation European Union on watch for a possible cut from its top AAA rating, citing “concerns about the potential impact on these member states of what we view as deepening political, financial, and monetary problems within the euro zone.”

The action, of mainly technical interest since the bloc itself does not issue debt on a large scale, came after the agency on Monday put 15 of the 17 euro member nations on watch for downgrade, meaning all of the euro zone countries face ratings cuts — and potentially higher borrowing costs — if the crisis meetings fail.

“A bit of pressure is not unwelcome,” Jean-Claude Juncker, the Luxembourg prime minister who acts as head of the Eurogroup, said on French radio regarding the S.P. action, according to Reuters. Still, he said, “the pressure would have existed even if there hadn’t been these warnings from the agencies.”

In its second monetary easing in just five weeks, the European Central Bank cut its main overnight rate by a quarter of a percentage point, to 1 percent. The Bank of England’s Monetary Policy Committee, which also met Thursday, left the main British overnight rate unchanged at 0.5 percent.

Stocks in Europe closed lower across the board. The FTSE 100 index in London lost 1.1 percent, the CAC 40 index in Paris was down 2.5 percent and the DAX in Frankfurt was 2 percent lower.

The euro rose after the central bank lowered its interest rate, but then slumped. It was trading at $1.3363 from $1.3412 late Wednesday in New York.

Yields on Italian and Spanish bonds rose sharply after Mr. Draghi’s remarks. At the end of the session, the yield on 10-year Italian bonds climbed 47 basis points to 6.429 percent, and the Spanish yields advanced 39 basis points to 5.75 percent.

German 10-year bonds yields were 2.01 percent, down 9 basis points. A basis point is one-hundredth of a percent.

Asian shares declined. The Tokyo benchmark Nikkei 225 stock average fell 0.7 percent. The Sydney market index S.P./ASX 200 fell 0.3 percent. InHong Kong, the Hang Seng index fell 0.7 percent and in Shanghai the composite index fell 0.1 percent.

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Leaders Struggle for Deal to Keep Euro Intact

The emerging solution is being negotiated under great pressure from the markets, the banks, the voters and the Obama administration, which wants an end to the uncertainty about the euro that is dragging down the global economy.

In the process, European leaders will begin to change the fundamental structure of the union, creating a form of centralized oversight of national budgets, with sanctions for the profligate, to reassure investors that this kind of sovereign-debt crisis is finally being managed and should not happen again.

The immediate focus of worry is on Italy and Spain, which have been buffeted by market speculation even as they move to fix their economies. That process took an important step on Sunday, as Italy’s cabinet agreed to a package of austerity measures to put the country in line for aid that would improve its financial stability.

The new euro package, as European and American officials describe it, is being negotiated along four main lines. It combines new promises of fiscal discipline that will be embedded in amendments to European treaties; a leveraging of the current bailout fund, the European Financial Stability Facility, to perhaps two or even three times its current balance; a tranche of money from the International Monetary Fund to augment the bailout fund; and quiet political cover for the European Central Bank to keep buying Italian and Spanish bonds aggressively in the interim, to ensure that those two countries — the third- and fourth-largest economies in the euro zone — are not driven into default by ruinous interest rates on their debt.

But important disagreements persist, and the two primary leaders of the euro zone, Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, will meet on Monday in Paris to try to hammer out a joint proposal for the summit meeting. That meeting, which begins Thursday evening, is considered a last chance this year to set the euro right, even as some investors and analysts are beginning to predict its collapse.

“The survival of the euro zone is in play,” one senior European official said. “So far it’s been too little, too late.”

After consecutive, expensive failures to stabilize the markets and protect the euro, the broad plan emerging this week may have a better chance at succeeding, analysts say, in part because it weaves together measures that deal with the various issues of the euro, particularly the provision of a central authority that can monitor and override national budget decisions if they break the rules.

Still, even if all the parts are agreed upon in the meetings, which are bound to be fraught, the fundamental imbalances in the euro zone between north and south and between surplus countries and debtor ones will not go away. The euro will still be a single currency for 17 disparate nations in the European Union.

One dividing line is that the Germans, along with the Dutch and the Finns, remain adamantly opposed to what some consider the simplest solution: allowing the European Central Bank to become the euro zone’s lender of last resort and to buy sovereign bonds on the primary market, in unlimited amounts. Mrs. Merkel is also dead-set for now against collective debt instruments, like “eurobonds,” that would put taxpayers, particularly German ones, on the hook for the debt of others, which her government regards as illegal.

So Mr. Sarkozy and other European leaders are working on a less elegant and more phased way to create a pool of bailout money that is large enough to convince the markets there is little chance of a default on Italian and Spanish bonds, which should drive down rates to sustainable levels, European and American officials say.

Mrs. Merkel says it is time to get the euro’s fundamentals right. She is insisting on treaty changes to promote more fiscal discipline, including a limit on budget deficits, with outside supervision and surveillance of national budgets before they become dangerous, and clear sanctions for countries that fail to adhere to the firmer rules. Berlin wants the new standards backed up by the European Court of Justice or perhaps the European Commission, with the power to reject budgets that break the rules and return them for revision.

She would like the treaty changes to be accepted by all 27 members of the European Union, but failing that, she said she would accept treaty changes within the euro zone, with other countries who want to join in the future, like Poland, free to commit to the tougher rules now. Many countries, and not only Britain, are opposed to institutionalizing a two- or even three-tier European Union, fearing that their interests will be sacrificed and their voices diminished.

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Merkel, Sarkozy and Monti Meet to Try to Stem Crisis

STRASBOURG, France (AP) — French President Nicolas Sarkozy says that France and Germany will propose changing EU treaties to improve governance of the eurozone.

Sarkozy spoke after meeting with German Chancellor Angela Merkel and Italian Prime Minister Mario Monti on Thursday, their first meeting since Monti took over amid market panic over Italy’s huge debts.

Sarkozy said that the three are committed to saving the shared euro currency.

France had been reluctant to make any changes to eurozone governance via treaty changes, something Germany had supported.

But Sarkozy said Thursday that France and Germany would present “propositions for the modification of treaties” in the coming days.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

STRASBOURG, France (AP) — The role of the European Central Bank in stemming Europe’s crippling debt crisis will likely figure prominently in discussions later Thursday between the leaders of Germany, France and Italy.

It’s the first time Italy’s new prime minister, Mario Monti, is meeting German Chancellor Angela Merkel and French President Nicolas Sarkozy since he took charge last week in the wake of growing market concerns over the size of his country’s debts.

The meeting in Strasbourg, France comes amid signs that even Germany and France — the eurozone’s two biggest economies — are not immune from the debt crisis that’s already seen three relatively small countries bailed out.

A failed German bond auction on Wednesday and another warning that France may see its cherished triple A credit rating downgraded, form the uncomfortable backdrop to the discussions between the three leaders.

Though German and French borrowing rates are well below the 7 percent level that eventually forced Greece, Ireland and Portugal into seeking financial bailouts, they have been rising markedly in recent days. Germany’s ten-year yield has ratcheted up around 0.25 percentage point over the past 24 hours since the auction to stand at 2.12 percent, while France’s has been rising steadily in recent weeks to 3.6 percent on Thursday.

Italy’s though have hovered around the 7 percent level for a couple of weeks now, and that’s a real cause for concern for the eurozone as the current bailout facilities are not big enough to bailout the eurozone’s third-largest economy. Italy’s debts stand at around euro1.9 trillion ($2.5 billion), or around 120 percent of the country’s national income.

The meeting is aimed at “showing support for Mario Monti and his policy of reforms,” French government spokeswoman Valerie Pecresse said Wednesday.

However, a big element of the discussions are expected to center on the European Central Bank’s role, which many think is the only institution capable of calming frayed market nerves. Potentially, the ECB has unlimited financial firepower through its ability to print money.

While Germany finds the idea of monetizing debts unappealing, Sarkozy’s government has been pushing for the ECB to play a more active role.

France has repeatedly been frustrated in its push for the ECB to play a greater role in resolving the crisis by Merkel’s fierce opposition. France’s finance minister, Francois Baroin, has raised the possibility of allowing the ECB to act as lender of last resort to financially troubled countries locked out of lending markets by the punishingly high interest rates increasingly demanded by bond market investors.

Merkel also clashed with the head of the European Union on Wednesday over another proposed solution to the European crisis — common bonds issued by all 17 nations that use the euro currency.

A European bond could promote stability in the markets. But Merkel said it would not solve “structural flaws” with the euro, and, in a testy exchange, an EU official said Merkel was trying to cut off the debate before it could even start.

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Markets Slide as Greece Sets Referendum on Aid Deal

The proposed ballot will put Greek austerity measures — and potentially membership in the euro zone — to a popular vote for the first time, risking Mr. Papandreou’s political future and threatening even greater turmoil both among the countries that share the single currency and further afield.

His announcement sent tremors through Europe’s see-sawing markets on Tuesday, with bank stocks taking a particular hammering because of their exposure to Greek debt. At midday, the German DAX index was down by 5.3 per cent while the French CAC 40 had slipped by roughly 4.2 per cent. In Britain, which is not a member of the euro zone but trades heavily with continental Europe, the FTSE 100 index was down by around 3.2 percent.

President Nicolas Sarkozy of France is expected to speak with German Chancellor Angela Merkel by phone during the day on Tuesday to discuss the referendum, which took both leaders by surprise, Agence-France Presse reported. The French president was said to be “dismayed,” according to Le Monde, citing an unnamed confidant of Mr. Sarkozy.

The German Finance Ministry deflected questions in a statement early Tuesday that the call for a referendum “is a domestic political development on which the German government has no official information yet and which therefore it will not comment on.”

But Rainer Brüderle, a senior member of Ms. Merkel’s governing coalition and a former finance minister, said in a radio interview on Tuesday that he was “irritated” by the move, which he called “a strange thing to do.”

“This sounds to me like someone is trying to wriggle out of what one has agreed to,” he was quoted by Der Spiegel as saying.

Mr. Papandreou’s surprise promise of a vote on the austerity package introduced a note of uncertainty in what had seemed to be a done deal, threatening a comprehensive agreement reached by European leaders last week to shore up the euro zone. A rejection by the voters would also be likely to be treated as a vote of no confidence in the government and lead to early elections.

The anxiety stirred up by those fears hammered United States financial markets on Monday, showing once again how the domestic politics of even the smallest members of the European Union can create troubles that not only threaten the currency but reverberate around the globe.

Addressing lawmakers on Monday evening, Mr. Papandreou said the decision on whether to adopt the deal, which includes fresh financial assistance, debt relief and deeply unpopular austerity measures, properly belonged to the Greek people.

“Let us allow the people to have the last word, let them decide on the country’s fate,” he said.

It was unclear how the referendum would be worded, but Mr. Papandreou said it would be a vote on whether or not Greeks supported the debt deal and the program of austerity measures in exchange for foreign aid.

The stakes are extremely high. A no vote could break the deal between Greece and its so-called troika of foreign lenders — the European Union, European Central Bank and International Monetary Fund — which have demanded structural changes and austerity measures in exchange for aid.

Without the aid, Greece would not be able to meet its expenses and would default on its debt, sending shock waves through the euro zone and the world economy.

A yes vote, on the other hand, would move the package forward, effectively shifting responsibility for the nation’s painful economic choices from Mr. Papandreou’s Socialist Party onto the public. That outcome would help Mr. Papandreou shore up his political fortunes and avoid the instability of early elections.

The center-right opposition has opposed the bulk of the austerity program, and the prime minister’s popular support has dwindled as Greeks have been hit by a seemingly endless series of tax increases and wage and pension cuts. On Sunday, the center-left newspaper To Vima reported that a majority of Greeks viewed the deal negatively.

The leader of Greece’s main conservative opposition party New Democracy, Antonis Samaras, told reporters in Athens on Tuesday that his party would do whatever it takes to force early elections and accused Mr. Papandreou of acting selfishly by calling for a referendum.

“Mr. Papandreou, in his effort to save himself, has presented a divisive and extortionate dilemma,” Mr. Samaras said following talks with President Karolos Papoulias.

Niki Kitsantonis reported from Athens, and Rachel Donadio from Rome. Alan Cowell contributed reporting from London and J. David Goodman from New York.

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Europe Agrees to Basics of Plan to Resolve Euro Crisis

The agreement on Greek debt was crucial to assembling a comprehensive package to protect the euro, which has been keeping jittery markets on edge.

The accord was reached just before 4 a.m. after difficult bargaining. The severe reduction would bring Greek debt down by 2020 to 120 percent of that nation’s gross domestic product, a figure still enormous but more sustainable for an economy driven into recession by austerity measures.

The leaders agreed on Wednesday on a plan to force the Continent’s banks to raise new capital to insulate them from potential sovereign debt defaults. But there was little detail on how the Europeans would enlarge their bailout fund to achieve their goal of $1.4 trillion to better protect Italy and Spain.

After all the buildup to this summit meeting, failure here would have been a disaster. While the plan to require banks to raise new capital was generally approved without difficulty — banks will be forced to raise about $150 billion to protect themselves against losses on loans to shaky countries like Greece and Portugal — the negotiations over the Greek debt were difficult.

“The results will be a source of huge relief to the world at large, which was waiting for a decision,” President Nicolas Sarkozy of France said.

Chancellor Angela Merkel of Germany said: “I believe we were able to live up to expectations, that we did the right thing for the euro zone, and this brings us one step farther along the road to a good and sensible solution.”

In the face of considerable pressure from Europe’s leaders, the banks had been resisting requests that they voluntarily accept a loss of about 50 percent on their Greek loans, far more than the 21 percent agreed to previously. But after months of denying that Greece would have to restructure its large debt, which was trading at 40 percent of face value, European leaders forced the much larger reduction, known as a “haircut,” on the banks, while the International Monetary Fund promised more aid to Greece.

Germany had taken a tougher stance than France with the banks. Mrs. Merkel was willing to think about imposing an involuntary write-down on the private sector, but Mr. Sarkozy remained worried about the consequences on the markets and the banking system.

In a statement, Charles Dallara, managing director of the Institute of International Finance, which represents the major banks, said he welcomed the deal. He called it “a comprehensive package of measures to stabilize Europe, to strengthen the European banking system and to support Greece’s reform effort.”

In a meeting described as crucial for the fate of the euro zone, the leaders had been trying to restore market confidence in the euro and in the creditworthiness of the 17 countries that use it.

In what the leaders saw as an important first step, banks would be required under the recapitalization plan to raise $147 billion by the end of June — enough to increase their holdings of safe assets to 9 percent of their total capital. That percentage is regarded as crucial to assure investors of the banks’ financial health, given their large portfolios of sovereign debt.

German lawmakers voted overwhelmingly on Wednesday to authorize Mrs. Merkel to negotiate an expansion in an emergency bailout fund to $1.4 trillion, more than double its current size of about $610 billion. The vote followed Mrs. Merkel’s plea that the lawmakers overcome their aversion to risk and put Germany, Europe’s strongest economy, firmly behind efforts to combat the crisis, which has unnerved financial markets far beyond the Continent.

“The world is looking at Germany, whether we are strong enough to accept responsibility for the biggest crisis since World War II,” Mrs. Merkel said in an address to Parliament in Berlin. “It would be irresponsible not to assume the risk.”

The $1.4 trillion figure was generally accepted as the likely target for negotiators here, but many questions remained about how the enlarged fund would be financed.

Jack Ewing contributed reporting from Frankfurt, Rachel Donadio from Athens and Elisabetta Povoledo from Rome.

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European Officials Shaping Greek Rescue and Effort to Aid Banks

On the second day of talks here, the ministers also said that holders of Greek bonds would have to take much bigger losses than the 21 percent originally agreed to in July, though one bank official said that despite the ministers’ consensus, no agreement was near on write-offs that could reach as high as 60 percent.

The ministers also reported that France and Germany had made progress on a third issue, how to increase the firepower of a rescue fund for the euro zone. Germany’s chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, along with other European leaders, continued negotiating later Saturday.

“I believe that now we have reached a more realistic view of the situation in Greece and that we will provide the necessary means to be able to protect the euro,” Mrs. Merkel said as she arrived at a gathering of European center-right leaders outside Brussels. The Sunday meeting would not bring final decisions, she said, adding that the leaders would take definitive steps at another scheduled meeting on Wednesday.

Despite resistance from Spain and Italy, agreement seemed close on a plan worth around 100 billion euros, or $138 billion, to recapitalize European banks. The measure is intended to help banks better withstand turmoil in the markets.

“We have laid down foundations for an agreement on the banking side,” said Anders Borg, Sweden’s finance minister.

The talks on Saturday established an improved tone over the past week, when differences between Mrs. Merkel and Mr. Sarkozy burst into the open.

But the challenge remains for leaders to construct a comprehensive and credible package of measures by Wednesday’s meeting.

Ministers were on track to ask bankers to write off around half of the value of their Greek bond holdings after a report by international lenders suggested that the economy in Greece had deteriorated so significantly that the 60 percent haircut was needed.

“We have agreed yesterday that we have to have a significant increase in the banks’ contribution,” Jean-Claude Juncker of Luxembourg, who is the head of the euro group of finance ministers, said on Saturday. He did not offer a specific figure.

But Charles Dallara, the managing director of the Institute of International Finance, which has been negotiating on behalf of the banks, said the two sides were “nowhere near a deal,” The Associated Press reported.

One remaining worry is that Greece shows few signs of returning to economic growth and, though he declined to say how much in losses banks would be willing to accept, Mr. Dallara added, “We would be open to an approach that involves additional efforts from everyone.”

Greece’s deteriorating economic outlook was the subject of intense discussions among the ministers with Germany and the Netherlands pressing their case that private investors needed to take bigger losses.

According to the international lenders’ report, a 60 percent loss for bondholders would be needed to bring Greece’s debt below 110 percent of gross domestic product by 2020. That represents a huge increase from the 21 percent losses private investors agreed to accept only three months ago.

Without action, Greece’s financing needs could amount to roughly 252 billion euros through 2020, the document said, while under a worse outlook, the needs, including rollover of existing debt, could approach 450 billion euros. The emerging comprehensive package is highly complex and involves painstaking negotiations around issues that are often linked. For example, the deal to strengthen European banks is seen as vital to protect the banks from the fallout from write-downs on Greek bonds.

The ministers agreed on Friday to release the majority of loans worth 8 billion euros to prevent Greece from defaulting. The International Monetary Fund could contribute about 2 billion euros to that fund.

The biggest area of difference between France and Germany seemed to be narrowing after France appeared to be giving ground on how to bolster the euro rescue fund.

Mrs. Merkel had firmly opposed the French suggestion that the fund, the European Financial Stability Facility, should get a banking license, which would enable it to borrow from the European Central Bank.

France’s finance minister, François Baroin, said on Friday that the issue was “not a definitive point of discussion for us,” adding that “what matters is what works.”

On Saturday, the Dutch finance minister, Jan Kees de Jager, said that use of the central bank was “no longer an option” but that two options were under consideration.

Both options involve plans to insure against a portion of losses on Italian or Spanish bonds. Under one version this insurance would be offered by the bailout fund.

The other would form an agency to buy bonds, perhaps attracting new investors like sovereign wealth funds. This would buy bonds on the primary and secondary markets using insurance offered by the bailout fund, said one official briefed on discussions but not authorized to speak publicly.

One advantage of this plan might be that it could force clearer conditions for reform on countries whose bonds are bought.

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