French-German Impasse: EU to Hold Second Summit Next Week Due to Differences

The European Union is to hold a second summit next week in addition to its meeting this Sunday. The reason is an ongoing dispute between Germany and France over how best to maximize the impact of the euro backstop fund, the EFSF. According to media reports, Sarkozy and Merkel discussed the delay on Wednesday night.

German Chancellor Angela Merkel and French President Nicolas Sarkozy have been unable to reach an agreement on a comprehensive bailout for the euro this week. Zoom
AP

German Chancellor Angela Merkel and French President Nicolas Sarkozy have been unable to reach an agreement on a comprehensive bailout for the euro this week.

It has been hard to miss in recent weeks the degree to which Germany and France disagree when it comes to combating the debt crisis and propping up the European common currency. On Thursday, press reports indicated that European Union leaders have now called for a second EU summit to be held next week in addition to the meeting currently scheduled for Sunday.

Volker Kauder, head of Chancellor Angela Merkel's conservatives in parliament, told the tabloid Bild on Thursday evening that a second summit has been called for Wednesday. The move is an admission that the European Union -- primarily Germany and France -- has been unable to come to an agreement on how to maximize the impact of the euro backstop fund known as the European Financial Stability Facility (EFSF).

The report from Bild comes after two other papers had reported that Sunday's summit might be delayed. The Financial Times Deutschland reported that Merkel and French President Nicolas Sarkozy had discussed the possibility of a postponement at a Wednesday night meeting in Frankfurt.

The primary sticking point has to do with leveraging the EFSF. The fund was just recently enlarged to provide it with a lending capacity of €440 billion ($603 billion). But with Greece now likely to need even more aid than first thought, European banks in need of recapitalization and the debt contagion possibly spreading to Italy and Spain, leaders have come to the realization that this sum is too small.

Paris and Berlin strongly disagree about how the impact of the fund should be maximized. Paris would like to see the EFSF granted with a banking license, which would allow it to borrow additional money, using its current assets, which include €780 billion in guarantees from euro-zone member states. The fund could then be worth up to €2 trillion.

Another Summit?

Berlin, supported by the European Central Bank, prefers an insurance model. The idea foresees the EFSF guaranteeing a portion of investors' purchases of sovereign bonds from debt-ridden countries. In the event of a debt haircut for a country like Greece, the EFSF would pick up the first 30 percent, for example, of an investor's loss.

German news agency DPA reported on Thursday that Sunday's summit will go ahead as planned, but a final decision about how to leverage the EFSF might be delayed. The agency said that another summit to address the issue could be called for next week.

Meanwhile, Merkel has reportedly cancelled an important address before parliament on Friday in which she had intended to discuss details about her government's planned changes to the expansion of the euro bailout fund. The reason for the cancellation is that details have not yet been completed for Merkel's proposal to leverage EFSF.

The summit was already postponed once. Originally scheduled to take place last week, no agreement was found on the EFSF and it was rescheduled for this Sunday.

In addition to the EFSF, European heads of state and government were set to reach agreement on a second bailout package for Greece. In July, EU leaders agreed to a €109-billion package, which included a debt haircut of 21 percent. Over the summer, though, it became apparent that Athens will need much more than that. In recent weeks, the EU has been discussing a debt haircut of up to 50 percent for the country.

The Greek parliament on Thursday is set to pass yet another round of tough belt-tightening measures as a requisite for receiving the next tranche of the first bailout package, worth €110 billion and passed in early 2010. Greek labor unions have called a two-day general strike this week in response to the austerity package and protests in Athens have turned violent at times. On Thursday, a 53-year-old union member died in the protests, though the cause of his death was initially unclear.

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