Germany and France row ahead of EU summit

The battle lines between France and Germany were last night threatening to scupper an outline for fiscal, banking, and political union in return for joint responsibility for debt that is aimed at restoring some market confidence in the eurozone.

EU leaders have succeeded in lowering expectations ahead of today’s summit, which was being touted by some as the most important of the current crisis.

Spain and Italy are leading the demand for some immediate action to reduce the pressure on their economies, which are both having to pay unsustainable rates for borrowing. Their message is that the crisis is continuing despite austerity and they need real help to stop the contagion.

The point was underlined by the decision of eurozone ministers to approve a full bailout for Cyprus, on the brink of bankruptcy because of the crisis in Greece.

They also confirmed €100bn for Spain to recapitalise its banks. There were also signs Slovenia is considering seeking a bailout shortly.

German chancellor Angela Merkel and French president François Hollande met in Paris last night after a day spent delivering war-like messages from their respective capitals.

The differences between the two countries was highlighted in a document intended to set the agenda for a much closer union. Much of the wording giving greater oversight powers of national budgets to Brussels was removed at the insistence of France, while much of the wording on sharing debt remained.

A furious Ms Merkel told the Bundestag yesterday: “Oversight and liability have to go hand in hand. There can only be joint liability when adequate oversight is ensured.”

On the steps of the Élysée last night she told journalists the situation was serious. “We have an obligation to build a strong and stable Europe... We need more Europe”

But her host, Mr Hollande, was not conceding any of the republic’s sovereignty, restating French opposition to giving up budgetary control. “Europe needs integration as much as necessary and solidarity as much as possible,” he said.

Four years of austerity have produced nothing but failure, the EU’s trade union body, ETUC, said.

ICTU general secretary David Begg said economic policies were stunting growth in Ireland and damaging recovery prospects.

He was part of a high-level trade union delegation in Brussels to meet the presidents of the European Commission and Council, and Employment Commissioner László Andor.

Mr Begg warned that Ireland’s recovery programme was built on the supposition that growth would be 3%-4% next year, but current projections say it will be little more than 0.5% of GNP. “This is a foundation of too much sand and not enough cement,” he said, calling for growth and job creation measures.

Mariano Rajoy, the Spanish prime minister, said institutions and financial entities in Spain, Italy, and other countries were unable to access the markets, and warned that Spain itself cannot continue at the kind of rates they must pay — 10-year Spanish bonds reached 6.93% in Madrid yesterday afternoon.

With Germany ruling out any direct recapitalisation of banks and bond buying by the EU’s bailout fund, the ESM, the most Spain can hope for is that the senior status given to ESM loans could be dropped. This is said to be putting off private investors from buying sovereign bonds.