Sarkozy, Merkel Press Debt Plan with EU Allies
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Sarkozy, Merkel Press Debt Plan with EU Allies

The leaders of France and Germany tried to rally fellow European conservatives Thursday around their latest bid to save the euro currency from collapsing under the weight of huge government debts.

German Chancellor Angela Merkel and French President Nicolas Sarkozy were meeting with heads of state and government from the center-right European People's Party in this Mediterranean port before moving on to Brussels for a crucial EU summit, with the 17-nation eurozone's fate in the balance.

The two sought backing for their plan to have eurozone nations submit their national budgets to much greater scrutiny. The Standard & Poor's rating agency injected urgency into those talks by warning it may downgrade the EU, just days after it threatened to lower its rating for 15 of the 17 euro nations.

"The longer we delay, the more costly and less productive the solution will be," Sarkozy told party members in this southern French port. "If we don't have an agreement Friday, there won't be a second chance."

Their plan seeks to enshrine tougher budget oversight in the existing EU treaty or alternatively, create a new one for the 17 nations that use the euro that other European nations could opt in to. It proposes automatic sanctions for breaking strict budget rules and a requirement to balance national budgets.

European Commission President Jose Manuel Barroso tried to project optimism Thursday morning that a deal to save the euro was in reach.

"I believe this is possible. My appeal — my strong appeal — to all the heads of state and government is to show this commitment to our common currency. I think this is indispensable, and leadership is about making possible what is indispensable," Barroso said.

Markets have mostly risen since last week on hopes that an agreement among European governments on the Franco-German plan would pave the way for the European Central Bank to intervene more aggressively to support eurozone bond markets. But investor optimism was deflated Wednesday after a German official said it could take up to Christmas to clinch a deal.

The head of the eurozone finance ministers said Thursday that leaders hope to get all 27 European Union countries on board with treaty changes this week.

"A treaty of all 27 members is to be hoped for, but if there are countries that don't want to accompany us in our search for a better European architecture then we'll go with a treaty of 17," Jean-Claude Juncker, the Luxembourg prime minister, told French radio France-Info.

Analysts said the summit was do-or-die for the eurozone.

"The politicians face a very stark choice between reaching an agreement that tees up the ECB to continue buying (bonds) and helping to restore confidence generally by their words and actions, or failing to agree and risk losing control of the situation, which could lead to a depression or worse," said Gary Jenkins of London's Evolution Securities.

The European Central Bank cut its key interest rate again Thursday by a quarter point to 1 percent to spur a slowing eurozone economy and said it was making more credit available to banks that are struggling because of the eurozone government debt crisis.

An alternative to support from the ECB could be greater help from the International Monetary Fund. Some European leaders have said their national central banks could lend money to the IMF, which could act as a backstop for financially weak eurozone countries.

A European Union diplomat said eurozone leaders are likely to agree to give the IMF euro150 billion ($200 billion) in bilateral loans to use as a firewall in the debt crisis. The money would come from the central banks of the 17 euro nations, not governments, which are already highly indebted.

The diplomat, was speaking on condition of anonymity because talks were ongoing, said some of the money had already been promised to the IMF in 2009 but has not been called upon yet. He did not say how much of the euro150 billion had already been promised.

He added that eurozone leaders hope non-eurozone countries would contribute an extra euro50 billion ($67 billion).

Prime Minister Jyrki Katainen of euro member Finland told The Associated Press he's "more optimistic" than just a few days ago that such an arrangement with the IMF can be agreed upon at the summit.

Failure to reach a political deal that could free up the ECB to intervene would likely trigger chaos on financial markets, potentially tearing apart the euro currency and destabilizing the global economy.

U.S. Treasury Secretary Timothy Geithner says reforms to deal with the debt crisis are "vital" but admitted that implementation will take some time. He spoke Thursday in Milan after meeting with new Italian Premier Mario Monti, part of a three-day trip across Europe to press the region's leaders to solve their differences over how to ease the euro crisis.

U.S. Secretary of State Hillary Rodham Clinton, speaking in Brussels, also upped the pressure on European leaders.

"We have a great stake in Europe's success ... and we are confident you will succeed," Clinton said, "But we do need a plan to rally behind, to know the way forward."

S&P highlighted the urgency of the situation when it said it may downgrade the triple A rating of the 27-nation European Union. S&P said it could cut the entire EU's long-term credit grade by one notch if it were to downgrade one or more members of the region's biggest countries.

The ratings agency hopes to conclude its assessments on the eurozone countries as soon as possible after the Friday summit. Following this, it expects to resolve its action on the EU as a whole.

Certain provisions in the Franco-German proposal, such as setting automatic penalties for countries that overspend, are controversial and could delay an agreement.

The eurozone leaders face a double dilemma of trying to sort out their own intractable debt woes, while striving not to alienate the 10 EU countries that don't use the common currency.

British Prime Minister David Cameron is wary Britain might lose influence in Europe if France and Germany create a tighter club of eurozone nations, and fears a dilution of Britain's decision-making powers to Brussels.

Among other things, the French-German plan would streamline the eurozone's future euro500 billion ($669 billion) permanent bailout fund by suggesting that a majority of countries who hold 85 percent of the ECB's capital should be sufficient to make all decisions. That would give the bloc's six biggest economies the power to outvote the remaining 11 nations, a move that is likely to be opposed by smaller countries.


Greg Keller in Paris, Gabriele Steinhauser and Slobodan Lekic in Brussels and Martin Crutsinger in Milan contributed to this report.

Copyright 2011 The Associated Press.