France, Germany rifts threaten debt summit

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Rifts between France and Germany over how to battle the eurozone crisis threatened Thursday to jeopardise a crunch EU summit this weekend, seen as vital for the future of the world economy.

After vowing decisive action to its G20 partners to resolve Europe's debt crisis, wrangling between Paris and Berlin prompted reports of a postponement of Sunday's summit as German sources meanwhile said there would be no deal.

With Europe's debt woes threatening to push the world back into recession, the two powerhouses have been scrambling to overcome differences over how to beef up the continent's financial rescue fund to save weak economies such as Greece as well as the likes of Italy and Spain.

Missing the birth of his baby daughter, President Nicolas Sarkozy rushed to Frankfurt Wednesday to iron out differences with German Chancellor Angela Merkel.

But in Berlin a day later, a source close to Merkel's coalition played down hopes of a breakthrough, saying no final decision was expected at the summit over how to manage the EU's debt bailout fund.

The summit would nonetheless go ahead, the source said, as a senior EU official confirmed "the summit will take place Sunday."

With the future of debt-straddled Greece topping a long to-do list, EU nations are to consider whether to approve a fresh eight-billion-euro loan to Athens, where chaos hit the streets in a second day of violent protests against the government's tough austerity plans in which one protestor died.

Hopes were that the three-day EU marathon beginning Friday and involving foreign ministers as well as heads of state and government, would agree to beef up Europe's financial rescue facility and recapitalise banks under threat from the burgeoning two-year euro-crisis.

Nations sharing the euro were expected to approve the next tranche of cash for Greece as it implements drastic belt-tightening that is infuriating unions but a final decision to help reduce Athens' 350-billion-euro debt mountain hangs in the balance.

In a plea for consensus, European Commission president Jose Manuel Barroso said a "very positive outcome was possible on Sunday if there is a sense of compromise by the participants.

"Europe needs a sense of compromise," he added. "I'm confident you'll do it," he said of the key figures.

In Frankfurt, German Finance Minister Wolfgang Schauble sought to soothe talk of friction, saying "France and Germany have a completely agreed position" but that it was not shared by all in Europe.

EU diplomats speaking on condition of anonymity said, however, that the two "are wide apart".

Speaking at a Brussels conference, Barroso said it was vital to reach agreement on strengthening Europe's rescue fund, the European Financial Stability Facility (EFSF), the bloc's primary weapon to stem the crisis.

"The need to reinforce the firewall" was prime, he said.

The EFSF currently has 440 billion euros to rescue nations in trouble but would need much more if it had to throw a lifeline to strugglers such as Italy or Spain, Europe's third and fourth largest economies.

One option under discussion is to use the cash as insurance for investors facing possible losses on their holdings of bonds issued by weaker member states but there are deep divisions over the best solution.

France had been pushing for the fund to morph into a bank that could borrow from the European Central Bank to help those in need.

Berlin is opposed to this on the grounds it would entail change to the EU's founding treaty -- changes which would require a potentially a long and painful ratification process.

They also differ on by how much to boost the fund's capacity, to somewhere between one and two trillion euros, an EU diplomat said.

Also on the agenda of the talks is how to strengthen banks, notably in France, holding debt from struggling nations.

Plugging the hole is a job the IMF reckons could cost 100-200 billion euros, and that ratings agencies suggest could result in a downgrade for France.

© 2011 AFP

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