Angela Merkel, the German chancellor, mounted stiff resistance
tonight to any swift bailout of Greece, as a rift opened up between
European capitals over how best to tackle the risks posed to the euro.
Despite a show of Franco-German unity on the crisis and the first
statement from EU leaders pledging to safeguard the currency's
stability, hopes on the markets of a German-led rescue plan to shore up
Greece's critical public finances were dashed by Merkel, who repeatedly
emphasised that Athens would need to put its own house in order and
brushed aside all questions of financial support.
"Germany is stepping totally on the brakes on financial assistance,"
said a senior EU diplomat. "On legal grounds, on constitutional grounds
and on principle." Another senior diplomat said of the Germans: "They're
not waving their chequebooks."
An EU summit of 27 government chiefs in Brussels was the first
opportunity to tackle the Greek crisis and also send a strong message to
the financial markets, which have been betting against the euro for the
last week.
Following talks between the Greek prime minister, George Papandreou,
Merkel, President Nicolas Sarkozy of France, and Jose Manuel Barroso and
Herman Van Rompuy, the European commission and European council
presidents, the leaders issued a statement aimed at restoring calm and
voicing political support for Papandreou's programme of swingeing budget
cuts and structural reforms.
The statement said the 16 EU countries who use the single currency,
including Greece, "will take determined and co-ordinated action, if
needed, to safeguard financial stability in the euro area as a whole."
That was seen as a strong political signal to speculators that the big
euro economies such as Germany and France would act persuasively to
restore confidence in the currency.
But there were no promises of funds for Greece and the statement
emphasised that "the Greek government has not requested any financial
support".
The European currency and the eurozone's stock markets gave a lukewarm
reception to the outcome of the summit. The euro lost 1% against the
dollar to $1.360, while the Dow Jones Stoxx 50 Index lost 0.7%. The
major French, German, Spanish and Italian indexes fell by between 0.5%
and 1.6%.
"This is little more than a sticking plaster at this stage," said Neil
Williams, fixed income chief economist at Hermes Asset Management. "What
is needed is a credible programme to help all the dominoes, not just
one, and this takes time."
Merkel and Sarkozy held a joint press conference after the summit to
demonstrate Franco-German unity, but that masked fundamental differences
over how to proceed.
"France and Germany cannot agree on anything," said a Brussels official.
"They are not always on the same page."
Berlin and Paris have been at odds for the last week through several
rounds of negotiations, with the French, backed by the Spanish, seeking a
solution through lending to Greece. But Germany and the European
Central Bank (ECB) took a hard line, arguing that the bigger risk to the
euro's stability came from bailing out a profligate member state which
has notched up a budget deficit of almost 13% and a national debt of
nearly €300bn.
The split meant 16 finance ministers could not agree a common position
before the summit. "Germany cannot justify its taxpayers having to
finance the lovely lives of the Greeks," said a senior diplomat.
Rather than bailing out Athens, Berlin is insisting on rigorous policing
of the Greek austerity programme by a triple force from the commission,
the ECB and the International Monetary Fund, an exercise never
attempted in the eurozone.
"We recognise our responsibility for the stability of the eurozone,"
said Merkel. "Greece is not demanding any money from us."
The three will judge, initially in March, whether the Greek programme is
being implemented "credibly, realistically and effectively", German
officials said.
Merkel said this was the best way to assuage the markets. The parallel
is with Ireland which has responded to a similar public finance crisis
with savage spending cuts, public sector wage and pension cuts and
restored market confidence.
Merkel's tough stance reflects her awareness that voters could react
angrily to having to contribute to a bailout at a time of tough budget
discipline at home.
Berlin also argues it has scant scope for manoeuvre legally as the
German constitutional court would be likely to rule, under the terms of
the Maastricht Treaty setting up the single currency, that Germany
cannot come to the bilateral aid of a single currency country in
trouble.
The European strategy that emerged tonight was one of wait, see and
hope. The Greek government does not need to raise any money until the
end of March at the earliest.
Jean-Claude Trichet, president of the ECB, complained that the
Papandreou medicine was not strong enough, and he was supported by
Berlin in demanding tougher action by the Greek government.
Papandreou has pledged to slash the ballooning budget deficit by 4% this
year alone. Merkel made clear that this would be taken as the measure
of success and that the commission, central bank and IMF experts would
need to hold the Greek prime minister to that pledge.
Meetings of eurozone and EU finance ministers next Monday and Tuesday
are to deal with the details of the European strategy, but these are
more likely to focus on how to police the Greek austerity package than
on bailout plans.
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