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Eurozone crisis: Germany and France clash over eurobonds at summit
French president François Hollande marks his Brussels debut by challenging chancellor Angela Merkel over bailout
Ian Tray nor in Brussels and Pat rick Wint our The Guardian, Thursday 2 4 May 2 01 2

Eurozone leaders Angela Merkel and Francois Hollande talk ahead of the latest Brussels sum m it. Photograph: Lionel Bonav enture/AFP/Getty Im ages

A major rift has opened up between Germany and France for the first time in 30 months of euro crisis over how to restore confidence in the single currency. A special EU summit marking the debut of France's President François Hollande saw him challenge Germany's chancellor, Angela Merkel, on the euro, arguing that the pooling of eurozone debt liability – eurobonds – had to be retained as an option for saving the currency. Merkel has ruled out eurobonds as illegal under current EU law. Hollande told the dinner of 27 leaders that he wanted to see eurobonds established, while conceding that this would take time, witnesses at the talks said. Merkel responded that this was nigh-on impossible since it would require changes to the German constitution and around 10 separate legal changes, the sources said. There was no policy breakthrough at the summit, rather a reiteration by leaders of known positions. Any decisions were postponed until the end of next month after French and Greek parliamentary elections on 17 June. The fissure between Paris and Berlin widened further when Hollande also called earlier for the eurozone's new bailout vehicle to be allowed to draw funds from the European Central Bank and to be able to recapitalise banks directly, both proposals fiercely resisted by Berlin and also currently impossible under EU law. Senior German government officials had insisted that eurobonds should not be even discussed at the summit. The Hollande team maintained that all topics were on the table and also held open the prospect that France could refuse to ratify Merkel's fiscal pact compelling debt and deficit reduction in the eurozone unless eurobonds were recognised as a possible tool.

Germany's central bank warned for the first time that if the Greek crisis came to a head. A series of marginal measures entailing use of EU budget funds and increased capital for the European Investment Bank to finance growth projects were criticised by economists and analysts as "a PR exercise"." It emerged that the Obama administration had sought at the weekend to "impose" a much tougher G-8 declaration on the crisis in the eurozone. referring to the efficacy of Brady bonds in the US in spurring economic growth. According to Reuters." The growing international exasperation with the Europeans' halting response to the crisis is being echoed by the deputy prime minister. The Franco-German clash was framed in terms of German-scripted austerity which has dominated two years of European response to debt crisis against a new French-led drive for growth policies at a time of record eurozone unemployment. In a speech in Berlin this evening he is expected to say that some world leaders "are saying behind capped hands that Europe is now congenitally incapable of exercising the leadership needed and it might be in everyone's interests if Greece left the Euro. The Bundesbank in Frankfurt said that Greece was threatening to renege on the terms of its 130 billion euro bailout. no hard decisions are expected until the end of next month. a significant dilution of existing agreements would damage confidence in all euro area agreements and treaties…calling into question the institutional status quo. "By contrast." Clegg said. ." The timing of the Bundesbank warning appeared directed at Wednesday night's talks. Merkel responded that eurobonds would "not make any contribution to stimulating growth. while Hollande enjoyed the discreet support of the Spanish and Italian governments as well as of the European Commission which is now backing the drafting of a "road-map" on the medium-term prospects for eurobonds. "The challenge this would create for the euro area and Germany would be considerable but manageable.Officials said that the inconclusive meeting saw a shift in the balance of power towards the French. It said that given the risks involved in bailing out Greece. 87 Fresh from the G-8 summit outside Washington at the weekend." the statement said. Britain is not involved and refuses to take part in the rescue effort. with supporters of Hollande's eurobonds demands increasing in number and becoming bolder. "We must build a firewall big enough and strong enough to stop the flames from spreading. meanwhile. Hollande's advisers also said they were inadequate to the scale of the challenge confronting a eurozone which could unravel. The Greek government on Wednesday night denied that such an instruction was issued. Germany's and the eurozone's interests would be best served by Greece's exit from the currency. Nick Clegg. but that Merkel had fiercely resisted and that the summit communique had to be rewritten as the US draft was too "awkward. Merkel appeared rather isolated. In what appeared to be a shot across the bows of the French. There was no final agreement on whether and how the extra capital for the EIB should be organised. With Berlin and Paris looking seriously at odds. That suggests weeks of greater uncertainty and friction between Germany and France which will unsettle the financial markets. eurozone governments should reconsider whether they should continue to provide a lifeline to Athens. the 17 governments of the eurozone were told on Monday to draw up individual contingency plans for a Greek exit. Despite the reference to "we". Hollande also sought to Share play the American card.

But Merkel and Hollande disagree on tactics towards Greece. say well-placed sources. Despite the differences between Paris and Berlin. with the French favouring sending a signal on easing the schedule for Greek deficit reduction while the Germans believe this would encourage Athens to compromise on the austerity measures. "There are too many unknowns. Mario Draghi. Hollande and Merkel. A ll r ig h t s r eser v ed. © 2 0 1 2 Gu a r dia n New s a n d Media Lim it ed or it s a ffilia t ed com pa n ies. the head of the European Central Bank.Senior EU officials also voiced exasperation with the recent rash of statements from David Cameron advising the eurozone what to do. are united in opposing a Greek exit from the euro in the belief that keeping Greece in will be hugely expensive but nonetheless much cheaper than letting it go." said another official. . officials said. used his summit platform to articulate the broad annoyance with Downing Street's comments on the euro crisis. "We couldn't care less what Cameron says." said another senior EU official.