Summit downgraded amid EU wrangling

SUNDAY’S EU summit — expected to be pivotal to the eurozone’s future — has been downgraded to an interim one with another called for next week because of wrangling between France and Germany over how to boost the EU’s bailout fund.

Markets held up reasonably well yesterday evening as the news was leaked mainly because of rumours suggesting the €440 billion fund was due to be increased massively to more than €1 trillion.

Despite the euro’s problems threatening to exacerbate a global slowdown, this will be the second time the EU’s two biggest members pulled the plug on agreeing the decisive decisions they promised. The summit originally scheduled for earlier this week was put off until this weekend.

The problems are compounded by the German chancellor, Angela Merkel, needing agreement from her parliament on the details before the summit. She has cancelled a speech to the Bundestag scheduled for today on the issue.

Eurozone Finance Ministers are to meet this afternoon in Brussels but it looks as though the German Minister, Wolfgang Schaeuble will not have a mandate. This meeting was to conclude the finer details of the comprehensive measures.

Last night’s decision on a second summit was unilaterally announced by Paris and Berlin in a statement saying they have agreed to provide a “comprehensive and ambitious global response to the current crisis in the euro area”.

This will include how new methods of EFSF intervention would operate; a plan to reinforce European banks’ capital; and economic governance and reinforced integration of the euro zone economy.

While the statement says that France and Germany have agreed all elements of the response, Chancellor Angela Merkel and President Nicolas Sarkozy are to meet in Brussels on Saturday night ahead of Sunday’s summit.

They say they will discuss in depth the response with the other EU leaders on Sunday, but add, “in order to be finally adopted...at a second meeting not earlier than Wednesday”.

Meetings in recent weeks, including between the two and the outgoing ECB president Jean-Claude Trichet in Frankfurt on Wednesday night failed to resolve their differences.

They called on Greece to reach a new agreement on private sector intervention to make their debt more sustainable. Negotiations have been on-going to with banking representatives to increase the level of investor losses above the 21% agreed in July up to possibly 60%. But the final figure would be dictated by the projected Greek debt which is to be included in the Troika report.

It is expected to show that Greek debt — reaching 180% — would not be sustainable without a haircut which could lead to the country having an orderly default. This will trigger a reaction across the eurozone, not least in French banks that has the second highest exposure to Greek debt after Greek banks.

Mr Sarkozy wants the EFSF to be beefed up to provide funds for bank recapitalisations and a number of leveraging schemes have been suggested that would increase its fire power to around €1.5tn but which would effectively leave the European Central Bank providing the backstop.

A study on banks’ ability to withstand a Greek default is expected to show that many need to be recapitalised. Sources suggest no more than €80bn will be required, but some fear this may not be sufficient as some question the credibility of the criteria.

European Commission president Jose Manuel Barroso produced a document which he hoped the EU leaders would adopt, covering all aspects including governance and growth. “Europe needs a sense of compromise”, he said, urging the leaders to deliver a deal.