Angela Merkel agrees on Greece rescue package – but wants new euro rules

EU summit pledges loan and IMF aid package
German leader pushes for tougher currency regime

Germany's chancellor, Angela Merkel, agreed for the first time yesterday on a "last-resort" rescue package for debt-stricken Greece, while pushing for a tough new regime of sanctions and penalties against European single currency countries whose fiscal misconduct endangers the euro.

Prodded by Merkel and the French president, Nicolas Sarkozy, the 16 countries using the single currency agreed a mixture of bilateral European loans and International Monetary Fund help for Greece if it finds itself facing default, unable to refinance its ballooning debt.

"This is a political text giving a political signal," said Herman Van Rompuy, the European Council president who chaired last night's EU summit in Brussels.

While the eurozone leaders hoped the package agreed last night would suffice to calm the markets and they would not need to supply tens of billions of euros to Athens, the statement agreed they were "ready to contribute to co-ordinated bilateral loans … This mechanism has to be considered ultima ratio", or a last resort if Greece is unable to raise enough money on the markets to avoid the risk of sovereign default, the statement said.

Faced with widespread hostility at home to bailing out Greece, Merkel has painted herself into a corner in the past fortnight by resisting strong pressure from elsewhere in the EU to concoct a rescue package for Athens that might calm the markets and reduce the high rates Greece faces for borrowing money.

Merkel and Sarkozy agreed the pact just before a summit of 27 EU leaders last night. The deal was then put to the 16 eurogroup countries that use the single currency and to the 27 EU leaders.

The hope is that the deal on Greece, going further than the EU leaders' first attempt to promise action last month, will resolve the crisis. Jean-Claude Trichet, the head of the European central bank, who has been strongly opposed to IMF involvement, said he was confident the summit had come up with a "workable solution".

The Merkel-Sarkozy document goes further than the immediate Greek crisis, representing a German attempt to rewrite the rule book for the euro and forestall the possibility of a bigger single currency emergency. "The agreement describes the conditions under which the EU and the IMF will intervene and beyond," said a French official.

Merkel insisted on IMF involvement, strongly opposed by Sarkozy, the ECB, and many others. The agreement specified that the single currency countries would make available the "majority" of the loans, on a "co-ordinated bilateral" basis and at market rates.

"Interest rates will be non-concessional, not contain any subsidy element," said the agreement.

These terms were dictated by Merkel, who feared that not involving the IMF or making loans available cheaply could expose her to a challenge in Germany's constitutional court.

Van Rompuy, though stressing he did not expect the package to be "activated", said that the IMF and the eurozone countries would act jointly and simultaneously if forced to intervene.

Merkel retained veto rights over coming to Greece's rescue, as Berlin and Paris tussled over what constituted a "last resort" in helping Athens. It was decided that the ECB and Jean-Claude Juncker of Luxembourg, the head of the eurogroup, would decide whether Greece had exhausted all options in raising money on the markets and needed rescue.

At that point, a meeting of eurozone governments would need to vote unanimously for loans to Athens, meaning Germany could still say no.

In return for the German concession, Van Rompuy was instructed to come up with proposals by the end of the year to strengthen the stability pact which sets debt and deficit ceilings for the eurozone and introduce new sanctions for fiscal miscreants. The Sarkozy entourage said that Van Rompuy would explore the potential for further "sanctions" including the possibility of expelling miscreants from the single currency, "to settle once and for all the question of euro countries in difficulties".

Merkel has been calling for the EU treaties to be re-opened to rewrite the rules.

"The Germans are really on their own there," said a European diplomat.

Van Rompuy voiced scepticism about opening the pandora's box of the Lisbon treaty only months after it came into force. "We can only propose with the consent of the member states," he said. "If there is no consensus on treaty change, we will not make any proposals."

EU governments expect the Greek crisis to come to a crunch in April or May, when Athens has to refinance €23bn (£20bn) of debt.