Germany dampens hopes as France warns of euro 'explosion'
European economic powerhouse Germany played down hopes Wednesday that a crucial summit will save the euro as French President Nicolas Sarkozy warned the risk of a eurozone "explosion" was still very real.
As German officials said reaching a deal would be "difficult" and expressed pessimism, US Treasury Secretary Timothy Geithner pressed European leaders for decisive action to tackle the debt crisis ahead of the summit starting in Brussels on Thursday.
Despite announcing comprehensive reform plans after meeting with German Chancellor Angela Merkel on Monday, Sarkozy said the threat of a eurozone collapse was far from being averted.
"Europe is not out of the crisis. The risk of an explosion abounds as long as the decisions taken with Angela Merkel are not implemented," he told lawmakers from his ruling UMP party, a participant in the meeting said.
France and Germany have called for changes to the EU treaty to improve the framework of the eurozone, which is now generally seen as defective, almost 10 years after the currency was introduced.
The summit, where leaders will look at ways of improving budgetary discipline and deepening economic union, is seen as crucial to efforts to stop the debt contagion threatening the eurozone and to salvage the embattled single currency.
A spokesman for Merkel said negotiations at the summit would be tough.
"We are expecting very challenging and occasionally very difficult talks," Steffen Seibert told journalists.
He said that Germany was travelling to Brussels with the desire for a "new legal framework" for the EU as a response to the debt crisis.
Earlier on Wednesday a German government source, who insisted on anonymity, poured cold water on hopes for a deal at the summit, saying he had become "more pessimistic" in recent weeks for a "total agreement" at the gathering.
"Several partners have not yet understood the gravity of the situation" facing the EU, the source said.
Austria joined Germany Wednesday in playing down expectations, with Chancellor Werner Faymann telling lawmakers the summit "will not meet the goal of creating a comprehensive firewall for the eurozone for the next three to five years."
What was achieveable, however, was a "massive increase in voluntary coordination," he said, including measures to foster greater budgetary discipline and to sanction countries running excessively high deficits.
Amid international concern the crisis will weaken the global economy, Geithner said he had told European leaders "how important it is for the US and countries around the world that Europe succeed."
"I'm confident they will succeed," he said after talks with French Finance Minister Francois Baroin in Paris.
Geithner, who is meeting leaders including Sarkozy, said he wanted to "make sure there is a sufficient strong firewall in place" to stop the crisis spreading.
Baroin stressed that in Brussels "neither Angela Merkel nor Nicolas Sarkozy will leave the table without a strong agreement being signed".
The eurozone's top powerbrokers will meet in a restricted session ahead of the full summit on Thursday, an EU diplomat said.
At the meeting will be Merkel, Sarkozy, European Central Bank head Mario Draghi, Luxembourg Prime Minister Jean-Claude Juncker, who is the head of the eurozone finance ministers' body, European Union president Herman Van Rompuy and European Commission chief Jose Manuel Barroso.
EU leaders are under intense pressure to convince markets they can come up with a rapid rescue plan for the eurozone following the threat of possible debt downgrades by ratings agency Standard and Poor's.
S&P's threat came hours after Sarkozy and Merkel announced their plan for a new EU treaty and tougher budgetary rules, including swift sanctions for lax eurozone economies, following crisis talks in Paris on Monday.
S&P's chief European economist Jean-Michel Six told France's Le Monde daily Wednesday the ratings agency "wanted to make strong signal to emphasise the gravity of the crisis."
European stocks and the euro slid on Wednesday as pessimism set in that the EU summit would not deliver a significant breakthrough.
London's FTSE-100 index of top companies ended the day down 0.39 percent to close at 5,546.91 points, while in Paris the CAC-40 dipped 0.11 percent to 3,175.98 points and Frankfurt's DAX 30 dropped 0.57 percent to 5,994.73 points.
Milan shed 1.24 percent and Madrid 0.79 percent.
The euro, which had earlier gained against the dollar, slid to $1.3391 from $1.3397 late in New York on Tuesday.
Wall Street was also down approaching midday, with the Dow Jones Industrial Average slipping 0.04 percent to 12,145.09 points, while the broader S&P 500-stock index shed 0.33 percent to 1,254.33 points and the tech-rich Nasdaq Composite tumbled 0.40 percent to 2,639.03 points.
© 2011 AFP