Is Sunday's European debt crisis summit sunk before it even starts?
With German Chancellor Angela Merkel and French President Nicolas Sarkozy at odds over how to leverage bailout funds, hopes for a solution from Sunday's debt crisis summit are wavering.
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Michael Wohlgemuth, managing research associate at Freiburg University, disagrees. “Of course the French see the risk of inflation as much as we do. But French banks are heavily exposed to southern European debt. And the country as a whole is about to lose its top credit rating. So France is willing to take risks and eager to spread possible losses.”Skip to next paragraph
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Germany’s preference for beefing up the rescue fund – even though it has not been officially confirmed – is an insurance model, in which sovereign bonds would only be partially guaranteed. By insuring only 20 percent of each debt issue, the EFSF could guarantee five times as much.
“There are two problems in the insurance model,” says Mr. Wohlgemuth. “Investors will still not accept government bonds from countries like Greece. And the likelihood that guarantee sums will actually have to be paid is increased.”
Desperate attempts to find common ground between France and Germany have not yet yielded any results. On Wednesday, French President Nicolas Sarkozy traveled to Frankfurt for an unscheduled and unsuccessful meeting with German Chancellor Angela Merkel while his wife Carla Bruni went into the hospital and gave birth to a daughter. A government statement by Mrs. Merkel on Friday about the rescue fund was canceled because there was nothing she could tell the public. The two leaders will meet again Saturday evening for a last-minute try at reaching an agreement.
But even if they do, Mrs. Merkel cannot sign any deal in Brussels. The budget committee of the German parliament on Friday voted to object to any changes of the rescue fund unless it is given more time to inspect the proposals. The votes included those from Merkel’s own party, the Christian Democrats (CDU).
Wolfgang Bosbach, a leading CDU member of parliament, explained his uneasiness. “More and more people think that we are not in control any longer, that markets dictate what we are doing. People think we’re acting in self-defense. As lawmakers, we have to regain the initiative," he said.
Wohlgemuth is similarly unimpressed by the proposed leverage of the EFSF. “In the end, no rescue fund of gigantic proportions will solve the crisis. Countries like Italy, Spain, even France, have to persuade international markets that they can control their debts and present a balanced budget. Otherwise this crisis will go on and get worse.”
But this would take time that Europe does not have, according to Mr. Timbeau. “Of course the EFSF is just a means to find breathing space to work on a sustainable solution. But if we can’t make this first step, we won’t be able to make the second.”