Leaders of France, Germany to Huddle Over Debt Crisis

Aug. 16, 2011
Analysts: 'The margin for disappointment is wide.'

France's Nicolas Sarkozy hosts Germany's Angela Merkel in Paris on Tuesday as jittery markets anxiously await any sign that European leaders have a plan to resolve the eurozone debt crisis.

European stock markets opened down as the French president prepared to host the German chancellor, with traders looking to Europe's power couple for reassurance, despite officials warning them not to expect major announcements.

Merkel and Sarkozy lead the eurozone's two biggest economies, but are split over how to address the crisis, with Berlin opposed to any move that would see its taxpayers underwriting its underperforming eurozone partners' debt.

The chancellor had been expected to come to the meeting the stronger of the two, with Germany's export-led economy looking powerful and France battling to shake off rumors that it might lose its to triple-A credit rating.

But, as she prepared to set off for Paris, Merkel's position was clouded by bad growth figures: Germany reported a meager 0.1% GDP expansion in the second quarter and slower first-quarter growth than initially reported.

News that even the German powerhouse -- and the probable eventual paymaster of any plan to resolve Europe's sovereign debt crisis -- was losing momentum sent stocks and the euro falling.

French growth is stagnant, and Brussels said that eurozone growth as a whole was only 0.2% in the second quarter.

In London, Paris, Frankfurt, Milan and Madrid, stock markets opened down. By halfway through the trading day, French, German and Italian stocks were down by more than 2%.

"There seems to be acute interest in this meeting, and we think the margin for disappointment is wide," analysts MR Global warned.

While officials on both sides of the Rhine tried to dampen speculation that Merkel and Sarkozy will come up with a stronger plan during Tuesday afternoon's talks at the Elysee, both see the Franco-German relationship as vital.

"Only a shared sang-froid, yoked to a determined response, will allow us to rein in the over-reaction on the markets," France's consumer affairs minister Frederic Lefebvre told Le Figaro, adding: "The Franco-German axis is strong."

Summit Will Not Address 'Eurobond' Idea

Prior to the talks, Berlin and then Paris already had said the summit would not address calls from some quarters for the eurozone to issue a "eurobond" to pool member states' government debt.

Such a system would make it easier for struggling members like Greece or Portugal to finance their massive deficits but also would transfer some of the cost of servicing these debts to German taxpayers.

Sarkozy has been pushing for a more centralized system of controls across the eurozone, better able in Paris' eyes to protect against future meltdowns.

But Merkel -- and German voters -- oppose any bid to create what they dub a "transfer union" in which Germany's powerful export-led economy effectively underwrites its underperforming eurozone partners.

This would be a complete non-starter for Berlin without a quid pro quo of new rules to enforce tougher fiscal discipline throughout the bloc.

French officials said Sarkozy still intends to urge an "acceleration" of reforms to Europe's financial institutions and hopes he and Merkel will agree on "common positions on the reform of the governance of the eurozone."

The ECB has begun heavily buying bonds issued by eurozone members, spending 22 billion euros last week to bring the total spent to 96 billion euros.

This has pushed down Italy and Spain's borrowing costs sharply, taking the immediate pressure off as they try to stabilize strained public finances.

Spain sold 5.7 billion euros in government bonds at sharply lower rates on Tuesday.

But, with the markets still jittery, traders are looking to Tuesday's Paris meeting for a sign of what might come next.

Over the weekend, German officials dampened talk of broader commitments -- rejecting both the idea of issuing joint eurobonds or of further expanding the 440 billion-euro European Financial Stability Facility.

Merkel and Sarkozy were to meet in Paris in the afternoon from around 2:30 p.m. local time (12:30 GMT), then hold a press conference before sharing a working dinner.

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