Slow train to eurozone rescue

  • 20 October 2011
  • From the section Business
  • comments

France and Germany are still promising a "comprehensive and ambitious response" to the eurozone's financial crisis.

That is confirmed in the latest Franco-German communique, which has just been published by President Sarkozy's office.

But agreement on the rescue package will now not be forthcoming at the summit of European leaders to be held this Sunday. Instead it will come at a second meeting by "Wednesday at the very latest".

Maybe it is the pledge of the French president and the German chancellor that the timetable won't slip again that has prevented panic from gripping financial markets this evening, at this latest manifestation of just how difficult it is proving to reconcile France and Germany on a vital element of the emergency deal: namely the method for increasing the financial firepower of the eurozone's rescue fund, the European Financial Stability Facility.

Debt cut

There is a second obstacle to announcing a definitive plan, which is that negotiations haven't yet begun properly with private-sector lenders to Greece on a significant reduction of what the Greek government will repay them, beyond the 21% cut they've already agreed.

In that context, some would say the one bit of good news today is that France and Germany have announced that formal negotiations with Greece's creditors on a significant debt write-off should begin.

But whatever heart anyone draws from that is undermined by the palpable problems Mrs Merkel is facing in persuading her parliament that the European Central Bank should stand behind the European Financial Stability Fund in making bailout loans to countries such as Italy and Spain that are struggling to borrow.

For Germans, the idea of central banks lending to governments is anathema. For them, it would be a hideous symbol of how the ECB is a pale shadow of what their beloved Bundesbank had been in the decades before they gave up the mark for the euro.

Or to put it another way, memories of hyperinflationary Germany still weigh on people and politicians.

Nerve-wracking days

So what on earth could be agreed this weekend?

Well, there should be progress on the recapitalisation or strengthening of banks, along the lines I've written about over the past 10 days, although the European Banking Authority's initial estimate that this would involve an investor-reassuring 200bn euros ($275bn; £175bn) may not be realised.

As the Financial Times implied this morning, bankers and regulators in national capitals are finding ways of massaging down what their banks will need to raise, so it's not clear whether the final fund-raising will be deemed to be adequate to protect the eurozone banking system from the losses that lie ahead.

So, as you've heard me say before, we're in for a nerve-wracking few days, as we wait to see whether France and Germany can reach an entente.

One other thing: how do other members of the eurozone feel about this very public display by France and Germany that their respective interests and ideas are of only secondary importance? It would be a somewhat painful irony if in patching up their differences, France and Germany succeeded in fomenting opposition from another proud eurozone nation.