PARIS, (Reuters) – France and Germany planned to lobby conservative European leaders on Thursday to back a plan to defuse the euro zone’s debt crisis, as Europe’s central bankers began a crucial meeting hours before a high-stakes EU summit.
Paris and Berlin need to win backing quickly for their plan to amend the European Union’s Lisbon treaty to toughen budget discipline, if they are to have it ready as they hope by March.
A French minister said the fate of the euro was at stake, but the chairman of euro area finance ministers said the currency itself was not at risk.
A top German official had deliberately lowered expectations on Wednesday for the summit, saying he was pessimistic of an overall deal.
The French official, Europe minister Jean Leonetti, said that U.S. Treasury Secretary Timothy Geithner had warned on Wednesday that the whole world was watching the euro zone.
“What that means … is that the euro can explode and Europe come apart. That would be a catastrophe not only for Europe and France but for the world,” Leonetti told Canal+ television.
An overhaul of the euro zone’s fiscal rules would boost the chances that the European Central Bank, which is expected to cut interest rates and announce new support measures for banks later on Thursday, would intervene more aggressively to calm the crisis.
Geithner urged decisive action during a visit to Europe this week, while Standard & Poor’s ratings agency ramped up pressure by threatening a mass downgrade of euro-zone sovereign ratings.
It extended that threat on Wednesday to include the European Union itself, which has had a top-notch AAA rating since the mid-1970s, and large euro-zone banks.
In one glimmer of positive news for stressed euro zone countries, two big financial clearing houses cut the cost of using Italian bonds to raise funds following some easing in the country’s bond yields.
French President Nicolas Sarkozy and German Chancellor Angela Merkel have a chance to rally many European leaders behind their masterplan at a congress of the conservative European People’s Party on Thursday in Marseille, southern France.
But the EU is divided going into the eighth crisis summit of the year, which starts with an informal dinner in Brussels on Thursday evening.
Summit chairman Herman Van Rompuy is urging leaders to avoid a laborious treaty change that could take up to two years by slipping stricter budget enforcement through in a protocol to existing treaties.
This infuriated Merkel and was one reason behind a gloomy briefing by a senior German official on Wednesday, who dampened hopes for a breakthrough and said some leaders and institutions still didn’t understand the seriousness of the crisis.
With many details still to be hammered out, doubts that the leaders can agree on a plan weighed on shares in Asia on Thursday but European stocks opened higher on hopes of a deal by Saturday morning, while the euro was steady.
NOT AT RISK?
Jean-Claude Juncker, veteran chairman of euro zone finance ministers, said the 27 EU government must come up with a response to stem the debt crisis at the Brussels meeting.
“There has to be a deal,” he told France Info radio. “The euro itself … is in no way at risk.”
A media report that the G20 was preparing a $600 billion lending facility for the IMF to support Europe briefly supported share prices in late U.S. trade, but the effect faded after it was denied by G20 officials and the IMF.
If all 27 EU states do not support more fiscal union by adapting the Lisbon treaty, which took eight years to negotiate, then Sarkozy and Merkel want the 17 euro zone countries to go ahead alone with more integration.
In a sign of how hard it may be to unite all 27 EU leaders behind treaty change, Czech Prime Minister Petr Necas was quoted as saying it was unacceptable to make countries send their budget plans to Brussels before they were approved by national parliaments. Prague is not in the euro zone.
Sarkozy was due to make a speech at 1230 GMT at the Marseille meeting. He and Merkel are both due to hold bilateral meetings later with Spanish Prime Minister-elect Mariano Rajoy before they head to Brussels.
“We need more binding and more ambitious rules and commitments for the euro area member states,” Sarkozy and Merkel wrote in a letter to European Council President Van Rompuy, who has made his own proposals for tackling the crisis.
“They should reflect that sharing a single currency means sharing responsibility for the euro area as a whole,” the letter added.
THE ART OF BUILDING A CONSENSUS
The Franco-German plan would slap automatic penalties on countries that overshoot deficit targets and make countries anchor a balanced budget rule in their constitutions. The sanctions could be stopped only if three quarters of euro zone countries are against them.
Not all euro zone countries are comfortable with all the French and German proposals, with Finland opposed to their call for majority votes on major policy decisions.
“Finland’s view is very clear, our stance is that unanimity is required in decision-making … and that is the view Finland will promote going forward as well,” Finnish Finance Minister Jutta Urpilainen told reporters on Wednesday in Helsinki.
ECB President Mario Draghi signaled last week that a “new fiscal compact” was a condition for the central bank playing a greater role in calming the debt crisis.
With financial market doubts hanging over the euro zone’s EFSF financial rescue fund, many economists say that the most effective way of getting a grip on the crisis would be for the ECB to buy euro zone government bonds more aggressively.
The ECB’s policy-making governing council will announce its policy decisions at 1245 GMT, with economists widely expecting a quarter-point interest rate cut to a record low of 1.0 percent, and moves to give banks longer-term liquidity on easier collateral terms.
In a sign of concern about the crisis beyond Europe, Geithner has met Sarkozy and Draghi among other top officials during a whistlestop tour of Europe to seek a breakthrough in the debt crisis.