France's President Franois Hollande.
European leaders were locked in deep divisions over the future of Greece and the single currency with Germany and France at loggerheads for the first time in 30 months over how to restore confidence in the euro.
A special EU summit marking the debut of France’s President François Hollande saw him challenge Germany’s Chancellor Angela Merkel on the euro, arguing that the pooling of eurozone debt liability – eurobonds – had to be retained as an option for saving the currency. Merkel has ruled out eurobonds as illegal under current EU law.
The fissure between Paris and Berlin widened further when Hollande also called for the eurozone’s new bailout vehicle to be allowed to draw funds from the European Central Bank and recapitalise banks directly. Both proposals are being fiercely resisted by Berlin and are also impossible under EU law.
Senior government officials from Germany insisted eurobonds should not even be discussed at the Brussels summit. But the Hollande team maintained that all topics were on the table and intimated that France could refuse to ratify Merkel’s fiscal pact compelling debt and deficit reduction in the eurozone unless eurobonds were recognised as a possible potential tool.
The Franco-German clash was framed in terms of the German-backed austerity measures which have dominated for the past two years against a new French-led drive for growth policies at a time of record eurozone unemployment.
A series of marginal measures likely to be agreed entailing use of EU funds and increased capital for the European Investment Bank to finance growth projects were criticised by economists and analysts as “a PR exercise”.
Hollande’s advisers also said they were inadequate to the scale of the challenge confronting a eurozone which could unravel.
In what appeared to be a shot across the bows of the French, Germany’s central bank warned for the first time that if the Greek crisis came to a head, Germany’s and the eurozone’s interests would be best served by Greece’s exit from the currency.
Declining stocks
According to the Reuters news agency, the 17 governments of the eurozone were told on Monday to draw up individual contingency plans for Greece’s exit.
Greece’s government denied that such an instruction was issued but not before investors, fearful of a disorderly break-up of the euro, led a sell-off on global stock markets.
The FTSE 100 fell 136 points, or 2.53%, while the leading indexes in France and Germany saw similar declines.
The Bundesbank in Frankfurt said that Greece was threatening to renege on the terms of its €130-billion euro bailout.
“The challenge this would create for the euro area and Germany would be considerable but manageable,” the statement said. “By contrast, a significant dilution of existing agreements would damage confidence in all euro area agreements and treaties … calling into question the institutional status quo.”
The timing of the Bundesbank warning appeared to be directed at the talks. It said that given the risks involved in bailing out Greece, eurozone governments should reconsider their lifeline to Athens.
No decisions
No decisions were expected. Herman van Rompuy, who was chairing the summit, said there should be no taboos and appeared to support French pressure for a discussion of eurobonds by calling for a debate on longer-term integration measures in the monetary union.
Merkel appeared isolated, while Hollande enjoyed the discreet support of the Spanish and Italian governments as well as the European commission, which is now backing the drafting of a road-map inn the medium-term prospects for eurobonds.
In his mediating role, Van Rompuy, the president of the European Council, is also expected to establish a eurobonds feasibility study.
With Berlin and Paris looking seriously at odds, no hard decisions are expected until the end of next month and after the Greece’s elections and France’s parliamentary poll on 17 June.
That suggests weeks of greater uncertainty and friction between Germany and France which will unsettle the financial markets even more.
Fresh from the G8 Camp David summit at the weekend, Hollande also sought to play the American card, referring to the efficacy of Brady bonds used by the US to solve the Latin America’s debt crisis of the 1980s.
Merkel responded that eurobonds would “not make any contribution to stimulating growth”.
‘Awkward’
It emerged that the Obama administration had sought at the weekend to “impose” a much tougher G8 declaration on the crisis in the eurozone, but that Merkel had fiercely resisted and that the summit communiqué had to be rewritten as the US draft was too “awkward”.
The growing international exasperation with the Europeans’ halting response to the crisis was echoed by Nick Clegg, the deputy prime minister.
In a speech in Berlin he said that some world leaders “are saying behind capped hands that Europe is now congenitally incapable of exercising the leadership needed and it might be in everyone’s interests if Greece left the euro”.
Clegg added: “We must build a firewall big enough and strong enough to stop the flames from spreading.” But Britain is not involved and refuses to take part in the rescue effort.
Senior EU officials also voiced exasperation over some of the recent statements from David Cameron, the prime minister, advising the eurozone what to do.
Despite the differences between Paris and Berlin, Hollande and Merkel, say well-placed sources, are united in opposing a Greek exit from the euro in the belief that keeping Greece in will be hugely expensive but nonetheless much cheaper than letting it go. “There are too many unknowns,” said the source.
But Merkel and Hollande disagree on tactics towards Greece, with the French favouring sending a signal on easing the schedule for Greek deficit reduction while the Germans believe this would encourage Athens to compromise on the austerity measures. – © Guardian News and Media 2012