PARIS/FRANKFURT, (Reuters) – Plans to tackle the euro zone debt crisis have stalled with Paris and Berlin at odds over how to increase the firepower of the region’s bailout fund, French President Nicolas Sarkozy said yesterday.
Sarkozy told French lawmakers the dispute was holding up negotiations and flew to Frankfurt to talk with German Chancellor Angela Merkel in an attempt to break the deadlock ahead of a make-or-break European leaders’ summit on Sunday.
The two leaders left that meeting without speaking to waiting reporters.
Asked if a deal had been reached, Jean-Claude Juncker, chairman of the Eurogroup of euro zone finance ministers who attended the evening meeting, replied: “We’re still in meetings Saturday, Sunday.”
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”.
“I believe this can come together and I believe that since our annual meeting in September, the Europeans have been much more … focused about this issue, but I also believe there’s not a lot of room for error,” World Bank President Robert Zoellick told reporters in Michigan.
Sarkozy was expected to return to Paris where his wife, the singer and former supermodel Carla Bruni, gave birth to a baby girl on Wednesday, according to French media.
A French presidency source earlier said the French and German leaders were meeting other euro zone policy chiefs and International Monetary Fund head Christine Lagarde on the sidelines of an event mark the end of Jean-Claude Trichet’s presidency of the European Central Bank.
DIVIDED OVER LEVERAGE
France has argued the most effective way of leveraging the European Financial Stability Facility (EFSF) is to turn it into a bank which could then access funding from the ECB, but both the central bank and the German government have opposed this.
“In Germany, the coalition is divided on this issue. It is not just Angela Merkel whom we need to convince,” Sarkozy told the parliamentarians at a lunch meeting, according to Charles de Courson, one of the legislators present.
His comments fuelled doubts about whether euro zone leaders will agree a clear and convincing plan when they meet on Sunday.
Failure to do so would further undermine financial markets’ already shattered confidence in the currency bloc and its ability to get on top of a two-year-long debt crisis, which threatens the long-term viability of the single currency.
Adding to uncertainty, the Financial Times reported that plans to strengthen the banking system, another key plank of the discussions, would fall short of market expectations.
The latest official estimates have put the banks capital shortfall at less than 100 billion euros, the FT said, compared with a recent IMF report putting the funding hole and 200 billion and analysts’ estimates of 275 billion or more.
One senior EU official, who is involved in coming up with solutions to the crisis, said the only “circuit-breaker” now was for the ECB to make an explicit commitment to go on buying distressed euro zone debt for “as long as it takes”, something Trichet has said should not happen.
However, Barroso appeared to back such intervention, saying in Frankfurt: “The decisive intervention of the ECB in secondary bond markets was and still is a critical element in securing financial stability in the euro area.”
Uncertainty over the euro zone’s future intensified as Moody’s issued a double-notch downgrade of Spain’s credit rating a day after the agency warned France its triple-A rating could come under pressure.
In Greece, parliament gave initial approval to a new round of belt-tightening measures needed to avert a default which could reverberate throughout the wider euro zone.
Greek police clashed with black-clad demonstrators outside parliament as workers began their biggest strike in years in protest at cuts demanded of their country in return for help.
Tiny Slovenia became the latest member of the 17-nation euro zone to suffer a credit downgrade when Standard & Poor’s cut its long and short-term sovereign rates to AA-/A-1+, from AA/A-1+, citing a weakened fiscal position.