Deadlock in the eurozone

German Chancellor Angela Merkel (right) and Economy Minister Philipp Roesler attend a session of the German parliament in Berlin, 21 October Angela Merkel (right) and her economy minister have promised to limit the German contribution

Having promised a comprehensive plan to fix the eurozone crisis this weekend, Europe's leaders are in disarray.

We are told that the European summit on Sunday has been downgraded. It will not take the key decisions. They will now be taken at another summit - not later than Wednesday next week, according to the French. How they can be sure that a deal that is elusive at the weekend can be delivered early next week is not easy to understand.

There were discussions to postpone the summit altogether but it has already been put back once and the French were insisted on the meeting.

Despite dashes to Frankfurt by President Nicolas Sarkozy, France and Germany are not in agreement. The meeting was testy. The French president - despite the good news that his wife Carla had had a baby - was grim-faced.

The two leaders may well meet again this weekend before the summit. The French leader has been piling the pressure on Angela Merkel warning that "Europe has a rendezvous with its history".

She has pointed out that "we live in democracies and have to operate according to fundamental rules".

This crisis has underlined that the EU, in large part, remains a Franco-German union. The other members of the eurozone appear as bystanders whilst the French and German leaders determine the fate of their currency.

Boxed in

The main sticking-point remains how to increase the firepower of the eurozone's main bailout fund, the European Financial Stability Facility (EFSF).

It already has a pot of 440bn euros ($595bn; £383bn) although that amount has been depleted by helping Portugal and Ireland and it will be depleted further by the the second Greek bailout.

It is nowhere big enough to provide an umbrella for a country as big as Italy if that country needs rescuing. Most analysts believe that Italy and Spain can only be safe-guarded if the facility can call on 2tn euros.

Both Germany and France are boxed in. The French cannot take on more commitments without risking losing their triple AAA rating. The German government has given an undertaking to its tax-payers that its contribution will not go above 211bn euros. That was underlined again on Friday by the German Economy Minister, Philip Roesler.

All kinds of options have been considered. The French wanted the fund to become a bank so it could borrow from the European Central Bank (ECB). The Germans have ruled that out.

Others suggested using the fund to offer insurance on government bonds but that, of course, carries the risk that tax-payers could be exposed to a large bill. Others have argued for using the fund to provide direct guarantees to countries in difficulty but that probably violates EU treaties.

So a search is under way to increase the size of the fund without increasing the liabilities of German taxpayers.

But if this is the main sticking point, agreement elsewhere is elusive.

Toll on Greece

The EU has not yet explained what its plans are for Greece. The Greek parliament approved the new austerity measures yesterday and Greece will get the next tranche of bailout money to tide it over, but this is a mere band-aid.

The agreement by the troika (the EU, the IMF and the ECB) is a fudge. Not only has Greece failed to reach its targets for reducing the deficit but, as the Financial Times reports, it believes that social unrest and industrial action are taking a toll on the economy.

The current situation is unsustainable. The economy is shrinking and tax revenues are down. Greece's debt mountain continues to grow. The head of Germany's second-largest bank, Commerzbank, Martin Blessing says Greece should declare itself insolvent and then restructure its debt.

At the meetings this weekend European leaders will discuss how to reduce Greek debt by forcing investors to take further losses (a hair-cut).

The banks and other investors had agreed in July to take a hit of 21% by postponing the dates they would get their funds back. The aim now is to get these investors to take a 50-60% hit.

But even here there are difficulties and disagreements. The banks may not play ball. The French worry that too big a loss would trigger what is called a "credit event", opening up all kinds of claims for compensation that might unsettle the international financial system.

The wider concern is, of course, what impact any Greek default would have on Europe's banks. Everyone agrees that the banks need strengthening but by how much?

The IMF says more than 200bn euros are needed. Others say more. The trickier question is where the money will come from. Ideally it would come from the banks themselves.

Tapping taxpayers - when the banks are so unpopular - would prove politically hard to sell and the banks are warning that if they boost their capital it will dent their ability to lend.

Beyond all this there are two other concerns. Both the Spanish and Italian economies have little to no growth. Unemployment is stubbornly high. It is not clear where the growth will come from to pay down their debts.

And even with those countries in the emergency ward - like Greece and Portugal - how will they climb back to financial health whilst they are cutting spending in the midst of a recession?

Last weekend Angela Merkel warned against expecting a "big bang" to solve this crisis. She was right. The eurozone crisis is complex and divisive.

Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 18.

    De Gaulle /Churchill would print trillions of Euros & keep tight grip of money supply & would have devalued the Euro & cut VAT
    They were real leaders & had all necessary of leaders.
    Sark & Merk have massive economic power in straightjacket of VAT & bungling.
    Devaluation effect of printing Euros to cover all debts can be offset by slashing VAT - improving growth across EU - a stabiliser

  • rate this

    Comment number 17.

    @ 9. FrankieBoy

    The Euro isn't weak at all. That's the problem for countries who in the past could devalue their currency in order to remain competiive.

    The percentage rate of German exports into the Eurozone has declined since the Euro has been introduced.

    Germany has no choice but to export (like Netherlands, Japan and so on) and to compete globally.

    Better others could do so as well.

  • rate this

    Comment number 16.

    This is the start of the end for either France nor Germany can afford to give in to this one so the compromise will have to be a fudge. That will just prolong the death of the patient. Eventually the contagious disease that started in the PIIGS will now spread across the majority of the Eurozone. The stronger ones may survive but the Euro will not.

  • rate this

    Comment number 15.

    The ECB was shaped like the Bundesbank: Independent from politicians and responsible only for the currency politics.

    The Banque de France always has been under the rule of the gouverment in Paris and had to act in favour of it's fiscal politics.

    Until today the French try to convert the ECB to a kind of Banque de l' Europe providing a leading role there for France.

    Dangerous for Europe indeed.

  • rate this

    Comment number 14.

    @ 12. Nautonier:

    "Referendum now" Correct.

    The British people want no part of this. We need out of this charade.

  • rate this

    Comment number 13.

    As long as no one expects us to contribute.

    We have and will always have the Pound. Ergo 'nothing to do with us guv'

    Barroso seems to think we should but then quite frankly he go ffffflagellate himself.

  • rate this

    Comment number 12.

    The only way out for the Eurozone/Euro is for the ECB to print Euros by the trillion & massively devalue the Euro.

    Anything else will fail. The Germans do not like going shopping with suitcases full of money - they have been there before.

    Failing that, the Euro crashes & is worthless.

    Referendum now

  • rate this

    Comment number 11.

    No blank cheque upon the German taxpayers. No grand gesture of trillions to the international finance speculators. No sudden default by Greece. Complex, and ultimately, not divisive, but coherent and sustainable. The gargantuan Euro vessel is being built and repaired as it moves upon the sea of global finance.

  • rate this

    Comment number 10.

    This is pushing a big hole around with a stick & trying to find somewhere for it to go. Its all pretty pointless because wherever it ends up it is still a hole. It will still have impact, there is no escape it is a question of how localised the impact is. In an interconnected system it is doubtful it can be kept localised, it will seep. So the game is pretending that taxpayers downside is limited.

  • rate this

    Comment number 9.

    The Euro has always been about the interests of France who have always wanted to subsidise it's way of life (farming) and Germany who want to sell cars. The problem is not about a bail out for Greece as much as France wants to print money and debase the currency but Germany wants to have the advantage of a weak currency without printing money.

    The end game is coming closer - good bye Euro!

  • rate this

    Comment number 8.

    The answer's simple. Ask for more from David "Peace in our time" Cameron, after all the UK has lots of money compared to most of these rotten (in financial terms) countries that joined the euro. The exception is of course Germany which has done well out of the euro thanks to joining on very advantageous exchange rates. That was just in pursuit of world domination.

  • rate this

    Comment number 7.

    Need something different, indeed dramatic: I vote for bringing back the idea of the "Hard Ecu", viz a parallel currency with national currencies brought back to run alongside. The Euro could stay & be run on Hard Ecu lines &, just as in London, where can borrow or invoice in either £ or $ ("eurodollars"), each country would have two currencies to play with. Can't be worse than present fiasco.

  • rate this

    Comment number 6.

    Greece just showing reality in EU,Germany/France do not have the 2T to fund what is needed by the E-zone. Troika is corrupt, IMF destroyed Zimbabwe.Zimbabwe went from being a creditor nation feeding Central Africa to the worst.They will do the same in Greece/EU.Greed is their game.

  • rate this

    Comment number 5.

    No doubt someone at some point in these comments will mention the Keynesian style of dealing with this crisis. Well sadly his ideas were all very well and good in the early 20th century. We're in a different era now; we have too much debt, too great a worldwide population to sustain, dwindling resources and too many blocs of power and spheres of influence to get to agree on a solution.

  • rate this

    Comment number 4.

    Why is there an international financial system that cannot sustain itself by way of its own insurances and related instruments?

    If it cannot support itself then it must be a fraud or ponzi based racket.

  • rate this

    Comment number 3.

    The German people are fed up of paying, the French banks are at breaking point and the rest of Europe cant afford it either. End of the road methinks.

    You cannot drink yourself sober and you cannot borrow yourself out of debt.

  • rate this

    Comment number 2.

    While they worry about how to boost the banks, the UK, Germany, Sweden, the Czech Republic and the Netherlands blocked the continuation of the funds which provide for European Food Banks (PEAD). The food banks help the people who are being hit by the fall-out from the Euro crisis. They don't help the bankers. Whose side are these governments' on ? Not the people needing to access the food banks.

  • rate this

    Comment number 1.

    Eurocrats fiddle about while the Treaty of Rome burns!

    The decline and fall of this Roman Empire did not take as long as the last!

    Good riddance. Get back to normality ever greater independence!


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