Sarkozy, Merkel press debt plan with EU allies

Europe's conservative political leaders on Thursday warned of dire consequences if an 11th-hour EU summit failed to save the euro from the crush of crippling state debts.

With the 17-nation eurozone's fate hanging in the balance, German Chancellor Angela Merkel and French President Nicolas Sarkozy told a gathering of the center-right European People's Party that they needed to agree to tougher rules on national budgets.

They will later head to an EU-wide summit in Brussels, where they are under immense pressure to reach a deal that can convince markets the euro will not break up, which would wreak havoc in the global economy.

The European Central Bank injected urgency into the coming talks by saying it had no plan to increase the scale of its bond interventions, which keep down the borrowing costs of weak countries like Italy and Spain, as markets had been hoping. Stocks, bonds, and the euro fell on the news.

ECB chief Mario Draghi had hinted last week that if governments agree to tighter budget controls, it might step up its fight against the financial crisis. Analysts said his comments on Thursday served to keep pressure on politicians to reach a deal.

Sarkozy issued a grand call for action, and many leaders admitted the situation was urgent, but it remained unclear how Friday's negotiations would proceed.

“Never has Europe been so necessary, and so much in danger,” the French president said.

Sarkozy and Merkel will bring to the EU summit a proposal to have European countries balance their budgets and to automatically sanction rule-breakers. They want to enshrine the tougher budget oversight in a treaty, either by changing the existing EU treaty or creating a new one for the 17 eurozone nations that others could opt in to.

“Words alone are not believed anymore because too often we did not live up to our words,” Merkel said.

European Commission President Jose Manuel Barroso tried to project optimism that a deal to save the euro was within reach. There will be “a consensus tonight and tomorrow” at the summit, he said.

But behind the scenes, many sounded reticent about ceding more national sovereignty to Brussels, fearing such concessions won't go down well with their electorates, particularly in member-states already feeling the austerity pinch.

Markets have mostly risen since last week on hopes that an agreement among European governments on the Franco-German plan would pave the way for the ECB to intervene more aggressively to support eurozone bond markets.

However, investor optimism was deflated on Wednesday, when a German official said it could take up to Christmas to clinch a deal, and then again on Thursday, when ECB chief Draghi lowered expectations that the central bank might step in with more help.

An alternative to support from the ECB could be greater help from the International Monetary Fund. Some European leaders have said that their national central banks could lend money to the IMF, which could act as a backstop for financially weak eurozone countries.

A European Union diplomat, speaking on condition of anonymity because talks were ongoing, said eurozone leaders are likely to agree to give the IMF €150 billion ($200 billion) in bilateral loans to use as a firewall in the debt crisis.

The money would come from the central banks of the 17 euro nations, not governments, which are already highly indebted.

The diplomat added that eurozone leaders hoped non-eurozone countries would contribute an extra €50 billion ($67 billion).

Agreeing to the Franco-German proposal will be difficult because some countries resist some of its provisions, such as setting automatic penalties for countries that overspend.

The eurozone leaders face a double dilemma of trying to sort out their own intractable debt woes, while striving not to alienate the 10 EU countries that don't use the common currency.

Jean-Claude Juncker, the head of the eurozone finance ministers, said leaders hope to get all 27 European Union countries on board with the treaty changes outlined by Sarkozy and Merkel this week.

“A treaty of all 27 members is to be hoped for, but if there are countries that don't want to accompany us in our search for a better European architecture then we'll go with a treaty of 17,” Jean-Claude Juncker, who is also Luxembourg's prime minister, said in an interview on French radio France-Info.

But Prime Minister Donald Tusk of Poland, which does not use the euro, said he opposes a two-speed Europe and that solutions must include all members.

As many leaders called for immediate stopgap measures to reassure markets, Spanish Prime Minister-elect Mariano Rajoy Brey brought up the need for economic growth, which has been glaringly overshadowed by all the recent talk about budgetary restraint.

Underscoring the urgency and the far-reaching impact of the euro crisis, U.S. Treasury Secretary Timothy Geithner was in Milan on Thursday to meet Italian Premier Mario Monti, as part of a three-day trip to press leaders to act. He says reforms to deal with the debt crisis are “vital” but admitted that implementation will take some time.

The threat of a collective downgrade by S&P also highlighted the need for the summit to deliver a solution. S&P placed placing the AAA long-term rating of the 27-nation EU on so-called CreditWatch negative, meaning it could be downgraded.

S&P said it could cut that the EU's rating by one notch if it were to downgrade one or more members of the region's biggest countries, such as France or Germany.

It hopes to conclude its assessments on the eurozone countries as soon as possible after the Friday summit. Following this, it expects to resolve its action on the EU as a whole.


Greg Keller and Sarah DiLorenzo in Paris, Gabriele Steinhauser and Slobodan Lekic in Brussels, David McHugh in Frankfurt, Juergen Baetz in Berlin and Martin Crutsinger in Milan contributed to this report.

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