Merkel heads to Brussels for crucial euro summit

Francois Hollande and Angela Merkel have differing views on debt management

 

European Union leaders are preparing to meet for a closely-watched Brussels summit on the fate of the euro.

On the summit's eve, German Chancellor Angela Merkel held two hours of talks with the French President Francois Hollande in Paris.

The two remain at odds on how to move forward, with Germany opposed to pooling debt while France insists the eurozone needs further integration.

Mrs Merkel has warned there is no "magic formula" to solve the crisis.

"Because I know the expectations and hopes that are pinned on this summit, I will repeat right at the start what cannot be said often enough," Mrs Merkel said in Berlin before the Paris talks.

"There is no quick solution and no simple solution. There is no one magic formula... with which the government debt crisis can be overcome in one go."

Mrs Merkel left for Brussels without making further statements after her meeting with Mr Hollande but said that "progress" for a pact for growth had been made and she hoped European leaders would adopt a 130bn-euro ($162bn) stimulus package.

Mr Hollande, who became French president on a ticket of anti-austerity, has been a strong supporter of the growth package.

European authorities have unveiled proposals such as the creation of a European treasury, which would have powers over national budgets.

The 10-year plan is designed to strengthen the eurozone and prevent future crises, but critics say it will not address current debt problems.

Spanish Prime Minister Mariano Rajoy said on Wednesday that his country could not afford to finance itself for long at current bond rates.

Spanish 10-year government bonds have been trading at yields above 6.8%, coming close to the 7% considered unaffordable.
'Vicious circle'
Several EU leaders want individual countries' debts guaranteed by the whole eurozone, for instance in the form of centrally issued eurobonds.

Protesters parked a mannequin of Angela Merkel outside her offices in Berlin

But Mrs Merkel told parliament that eurobonds were "the wrong way" and "counter-productive", adding: "We are working to breach the vicious circle of piling up debt and breaking [EU] rules."

She said to loud applause: "It is imperative that we don't promise things that we cannot deliver. Joint liability can only happen when sufficient controls are in place."

Stronger competitiveness was the condition for sustained growth, the chancellor said.

Mr Hollande believes eurobonds should be a eurozone priority for helping countries like Italy and Spain bring their borrowing costs down.

But Mrs Merkel continues to insist that before anything is done to increase the burden on German taxpayers, building blocks towards greater fiscal, banking and, eventually, political union must be put in place.

The BBC's economic correspondent Andrew Walker, in London, says that there is certainly a chance that the summit will take a small step on a path that would partly deal with the fundamental weaknesses in the Eurozone.

But, in the absence of major short-term action, he explains, borrowing costs for countries such as Spain and Italy are likely to remain painfully high, making the eurozone's financial situation strained for a long time to come.