EU Summit on Wednesday: Hollande To Confront Merkel on Euro Bonds

French President François Hollande will put German Chancellor Angela Merkel under pressure at Wednesday's EU summit to agree to euro bonds, which she has so far strictly opposed. Italy and Britain are expected to back Hollande in a further sign that Merkel is increasingly isolated in Europe with her austerity plan for saving the euro.

At odds over euro bonds: François Hollande and Angela Merkel at their first meeting last week in Berlin. Zoom
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At odds over euro bonds: François Hollande and Angela Merkel at their first meeting last week in Berlin.

The new president of France, François Hollande, wants to press German Chancellor Angela Merkel to drop her opposition to introducing jointly issued euro bonds as a way of tackling the debt crisis.

Hollande said after a G-8 summit in the United States on Saturday that he would propose euro bonds at an informal summit of European Union leaders on Wednesday in Brussels.

"I will outline all growth proposals at this informal meeting on May 23," Hollande told reporters at Camp David, Maryland. "Within this packet of proposals there will be euro bonds and I will not be alone in proposing them. I had confirmation on this at the G-8."

The Brussels meeting is expected to focus on the French president's call for measures to boost growth across the EU, especially in the 17 nation euro zone, while maintaining efforts to cut budget deficits.

Reports said Italian Prime Minister Mario Monti and British Prime Minister David Cameron back Hollande's call for the bonds that would be issued and guaranteed by all euro-zone states.

Merkel's Red Line

Merkel has so far strictly opposed euro bonds, arguing that the prospect of fresh debt at affordable interest rates for all members would remove an incentive for countries to maintain budget discipline. The bonds could also increase German borrowing costs, which are far lower than for most other euro member states because German debt is seen as particularly safe and is therefore in high demand.

Hollande pledged during his election campaign to challenge Merkel's austerity-led plan for rescuing the euro and to place greater emphasis on stimulating growth. The Socialist Party leader said he wanted to renegotiate the fiscal pact, which was agreed to by 25 out of the 27 EU leaders earlier this year and which enshrines lasting budget discipline.

At their first meeting in Berlin last Tuesday, Merkel and Hollande said they would resolve their differences in time for a regular EU summit at the end of June, and pledged to keep alive the Franco-German alliance seen as crucial for progress in the EU.

The G-8 summit came up with a vaguely worded declaration that papered over their differences. The leaders said growth should be balanced with debt reduction and they "welcomed" the European debate about measures to enhance growth.

Hollande, seen as the champion of southern euro states whose economies are struggling under radical spending cuts, is now putting Merkel under pressure by building an alliance in favor of euro bonds.

Berlin Hoping for Socialist Victory in French Parliamentary Elections

France will also push for a greater role for the European Central Bank in managing the debt crisis. The new French prime minister, Jean-Marc Ayrault, reiterated a proposal Hollande had made during the election campaign -- to allow the European Central Bank to lend directly to governments.

The ECB has so far rejected such calls because its statutes prohibit it from direct government financing. The idea, like euro bonds, is a red line for the German government.

Merkel doesn't expect to reach an agreement with Hollande on euro strategy before the French parliamentary elections on June 10 and 17, SPIEGEL has learned. Compromises are only likely ahead of the EU summit at the end of June, sources in Merkel's Chancellery said.

The sources added that even though Merkel backed Nicolas Sarkozy in the campaign, the German government is now hoping that Hollande's Socialists will win the June elections. If Hollande were confronted by a conservative majority in the French parliament, Franco-German cooperation would be even more complicated than it is already, the sources said.

cro -- with wire reports

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