Merkel rebuffs Sarkozy on euro zone solution
The rift between Europe's two biggest powers has already forced leaders to tack on an extra summit in the coming week. They will now meet twice – on Sunday and Wednesday – to try to adopt a comprehensive strategy to fight the crisis that began in Greece, spread to Ireland and Portugal and is now threatening to engulf bigger economies in the 17-nation currency area.
Senior European sources said Berlin and Paris were still at loggerheads on two core elements of a plan to build a firewall around Greece and stabilise bond markets -- how to scale up the euro zone's rescue fund and how to reduce Greek debt.
French President Nicolas Sarkozy appeared isolated after an acrimonious meeting in Frankfurt on Wednesday in seeking to turn the 440-billion-euro ($600 billion) EFSF rescue fund into a bank able to access ECB liquidity to fight contagion, and would have to back down, they said.
Germany, the ECB itself and the European Commission all argued that the move would violate an EU treaty prohibition on monetary financing of governments.
"The path is closed for using the ECB to ease liquidity problems," German Chancellor Angela Merkel told her conservative parliamentary caucus in Berlin, according to participants at a closed-door meeting.
Finance Minister Wolfgang Schaeuble hammered home the same message on arrival for a preparatory meeting of euro zone finance ministers in Brussels, telling reporters: "We will stick to the situation as it is in the treaty that the central bank is not available for state financing."
A German government spokesman said the most important decisions at the two-part meeting would only come on Wednesday. Merkel needed more time to secure parliamentary support under new rules that stipulate that the Bundestag's budget committee must approve all key EFSF decisions.
The timetable forced the EU to postpone a summit with China next Tuesday, highlighting how the debt crisis is impinging on Europe's place in the world.
Striking a new note of exasperated urgency, Chinese Premier Wen Jiabao told European Council President Herman Van Rompuy in a phone call that European leaders should take concrete actions to contain the crisis and stabilize the euro and financial markets.
The summit outcome will determine whether investors' confidence in the euro area can be restored. It will also influence whether an expected Greek debt write-down triggers a chain reaction of financial turmoil across Europe.
As a first step, leaders of the 27-nation European Union are set to endorse a plan on Sunday to strengthen banks' capital base and may also launch a procedure for longer-term reform of the euro area's economic governance, EU sources said.
European banks will be required to increase their core tier one capital ratio to 9 percent to help them withstand losses on sovereign debt, but it is not yet agreed how long they will be given to raise extra funds.
EU officials said the total amount required was just short of 100 billion euros. Those banks that cannot raise money on the markets will have to turn to national governments.
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