Sarkozy flies in for emergency euro talks to cement rescue deal

In Athens protesters hurl marble and petrol bombs at police
Nicolas Sarkozy
Nicolas Sarkozy arriving in Frankfurt, Germany. Photograph: Thomas Lohnes/AP




Herman Van Rompuy, the European Council president, who was also present, said Lagarde and Trichet would attend Sunday's eurozone summit in Brussels which is due to adopt a "comprehensive and global" deal to solve the sovereign debt crisis and prevent a renewed recession or even a slump. They were all taking part in a farewell ceremony for Trichet who leaves at the end of this month and who demanded "immediate action" to solve the crisis. Merkel called for "drastic changes to rules" and declared: "If the euro fails, Europe fails, but we will not allow that." She said she was convinced there would be a deal.

In Athens demonstrators hurled chunks of marble and petrol bombs at riot police as Greece staged the first day of a 48-hour general strike but the euro rose against the dollar and stock markets rose after the Guardian reported on a Franco-German deal ahead of Sunday's summit.

EU diplomats have said that the outline deal includes an agreement to boost the firepower of the eurozone bailout fund, the European financial stability facility (EFSF), from its current €440bn (£383bn) to around €2tn. This is the level demanded by the US and British governments and markets but some within Germany's divided coalition government would prefer an upper limit of €1tn.

This "leveraging" could be done by allowing the fund to become an insurer and offer first-loss guarantees to holders of government bonds issued by countries which get into financial trouble.

But Sarkozy, under pressure to save France's AAA credit rating and at risk of losing next year's presidential election to socialist François Hollande, was making a last-ditch effort to persuade a hostile Merkel and Trichet to turn the EFSF into a bank.

The eurozone leaders are also seeking agreement on recapitalising Europe's bigger ("systemic") banks, with well-placed sources indicating that this could require €100bn rather than the €200bn mentioned by Lagarde last month.

These two core elements of the promised "grand bargain" are linked to an agreement to make Greece's debt levels sustainable, with a report from a troika of the European commission, IMF and ECB due to be handed over to eurogroup finance ministers on Friday. This will inevitably impose bigger "haircuts", perhaps as much as 50%, on bondholders than the voluntary losses of 21% agreed in July.

Van Rompuy indicated that a deal to "stabilise the situation, restore confidence and foster economic growth and employment" remained on the cards despite political differences. He spoke pointedly of handing the 17 eurozone leaders an early draft statement to work on.

The renewed sense of urgency among eurozone leaders to solve the crisis is heightened by evidence that Europe's banks are finding it harder to borrow money from each other. The ECB reported that banks are now drawing up to €5bn from an emergency overnight lending facility that carries a punitive interest rate.

Earlier, José Manuel Barroso, EC president, held out the prospect of a political accord on the "comprehensive deal" at Sunday's eurozone summit. "We are at a crucial moment that demands clear and determined responses," Barroso said on launching a €50bn plan to speed up investment in big infrastructure projects.

He told reporters: "This weekend, I will insist on the need for decisive answers on all the five points of this roadmap, of this comprehensive package … It is a question of credibility for Europe that it can turn up at the G20 in Cannes with the main agreements in place."

His aides increasingly expect a political deal to be reached this weekend but stress that the technical details of working out an interlocking agreement on making Greek debt sustainable, recapitalising Europe's banks and boosting the bailout fund, the EFSF, are formidable.

Barroso said boosting the EFSF is necessary so the EU can respond to "situations" in countries not currently covered by bailout programmes. Greece, Ireland and Portugal are covered, but there are growing fears about Spain and Italy.

This weekend's summits will also be asked to endorse controversial plans to impose budgetary discipline on European countries "spending beyond their means", including punitive fines and other sanctions. The sanctions being discussed, diplomats say, include forcing national parliaments to tear up planned budgets and start again and sending in inspectors to crack the whip of fiscal rectitude.

Europeans 'slothful'

The solution to the eurozone crisis is for Europeans to work harder and for longer, rather than being cushioned by the welfare system, said Jin Liqun, chairman of China Investment Corp, China's sovereign wealth fund. He warned on Wednesday that Europe's fundamental problem was that its workers were simply not productive enough.
"The root cause is the overburdened welfare system built up since the second world war in Europe: sloth-inducing, indolence-inducing labour laws," Jin told Channel 4 News. The average Chinese working week is nearly 48 hours, the maximum allowed under European law. "We work like crazy," said Jin. Graeme Wearden

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