US backs euro as Germany doubts summit success

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US Treasury Secretary Timothy Geithner voiced confidence Wednesday that Europe would beat its debt crisis, but Germany said the success of a crucial EU summit this week was increasingly in doubt.

"I assessed how important it is for the US and countries around the world that Europe succeed," Geithner said after talks with French Finance Minister Francois Baroin in Paris. "I'm confident they will succeed."

But a senior German government source said a crunch European Union summit opening in Brussels on Thursday and widely seen as the last chance to save the euro was increasingly unlikely to provide the much-needed panacea.

"I have to say... that I am more pessimistic than I was last week on the chances of a total agreement," the source said. "Several partners have not yet understood the gravity of the situation."

The summit is crucial to efforts to stop the debt contagion threatening the eurozone and salvage the embattled single currency.

Leaders will look at ways of strengthening convergence, improving budgetary discipline and deepening economic union, with Geithner on a whistle-stop tour of the eurozone ahead of the summit to try to spur decisive action.

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.

"We need to take a decisive step towards the future structure of the eurozone... we cannot do this with a series of small steps," the source said.

Geithner, who is meeting leaders including French President Nicolas Sarkozy, said he wanted to "make sure there is a sufficient strong firewall in place" to stop the crisis spreading.

Baroin said the 17-member eurozone needed to create a "confidence shock" after months of what the markets perceive as leaders' torpor.

He stressed that in Brussels "neither (German Chancellor) Angela Merkel nor Nicolas Sarkozy will leave the table without a strong agreement being signed".

General firmness on financial markets on Wednesday reflected a sentiment of some optimism about the outcome.

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 announcement 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.

The debt warning means that Germany, France and other eurozone countries could lose their top-notch credit ratings without urgent action and their borrowing rates would probably rise.

However, Germany attracted strong interest at a bond auction on Wednesday.

Meanwhile the EU's EFSF bailout fund, also the target of the downgrade warning because it is backed by the ratings of eurozone countries, said it intended to issue short-term paper by the end of this year.

Geithner arrived in Paris from talks in European economic powerhouse Germany on Tuesday, including separate meetings with European Central Bank chief Mario Draghi and German Finance Minister Wolfgang Schaeuble.

EU president Herman Van Rompuy and Commission chief Jose Manuel Barroso will in Brussels raise the controversial idea of issuing so-called eurobonds backed by all eurozone members, which Germany strongly opposes.

A Van Rumpuy report lays out a vast array of measures, some of which are already in force or about to be enacted, to tighten monitoring and automatic sanctions against debt offenders, without necessarily requiuring a new treaty.

The German government source repeated Berlin's opposition to eurobonds, saying they would "increase the problems, not ease them".

Amid fears of a two-speed Europe with non-euro countries, including Britain, left on the outside, the source said there would likely be a separate meeting of the 17 eurozone members during the summit of the EU's 27 states.

Despite the downbeat German declarations, European stocks and the euro rose Wednesday with traders cautiously optimistic that the EU summit would deliver a significant breakthrough.

London's FTSE 100 index jumped 0.66 percent to 5,605.72 points nearing midday, while Frankfurt's DAX 30 gained 0.95 percent to 6,085.88 points and in Paris the CAC 40 advanced 1.50 percent to 3,227.33. Madrid won 1.16 percent and Milan 1.29 percent.

The euro climbed to $1.3416 from $1.3397 late in New York on Tuesday.

"This slightly better tone is in line with cautious optimism that the EU summit could lay the groundwork for a solution for the eurozone crisis," said Rabobank analyst Jane Foley.

After Paris, Geithner will travel to the southern French city of Marseille where Europe's conservative leaders are gathering before the summit, and hold a bilateral meeting with Spain's prime minister-elect Mariano Rajoy.

His final stop was expected to be in Italy, in the eye of the eurozone storm, where he will hold talks with Prime Minister Mario Monti.

© 2011 AFP

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