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Archive for Thursday, December 8, 2011

Germany, France scale back summit ambitions

December 8, 2011

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— German and French officials lowered expectations Wednesday for a deal to save the euro at this week’s European summit, deflating investors’ hopes for an imminent resolution to Europe’s debt crisis.

On the same day that German Chancellor Angela Merkel and French President Nicolas Sarkozy released the details of a plan for European nations to submit their economies to tighter scrutiny, a senior German official suggested a deal could be weeks away.

The summit, which begins tonight, has been described as do-or-die for the 17 countries that use the euro. A growing number of eurozone economies are being dragged down by crippling debts.

Further urgency was added Wednesday after the ratings agency Standard & Poor’s threatened to downgrade the bonds of all EU countries because their economies were intricately linked with those in the eurozone. That would likely make it more expensive for governments to borrow.

Earlier this week, expectations had been rising that an agreement would be reached this weekend, paving the way for the European Central Bank to take bolder action to reduce borrowing costs for Italy, Spain and other heavily indebted countries. That would give governments time to strengthen their finances.

But today the senior German official, who spoke on condition of anonymity because talks were ongoing, said reaching a deal might take until Christmas. European stocks, which had opened the day higher, fell after the comments were made and borrowing costs for weak eurozone governments rose.

“There is a very, very strong expectation that the summit is going to be a success so there is some potential for disappointment,” said Stefan Schneider, chief international economist at Deutsche Bank. “But if there is a convincing plan, which — in contrast to some of the previous plans — might survive the next two or three weeks, then that could support markets in the first two or three months of next year.”

The proposal from Merkel and Sarkozy seeks to enforce budget discipline either through a substantial change to the treaty governing all 27 EU countries, or an entirely new treaty for the 17 countries that use the euro.

In their letter to EU President Herman Van Rompuy, Merkel and Sarkozy stressed a decision was needed at this week’s meeting to have the new treaty in place by March.

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