Germany, France Delay Euro Rescue Plan

Leaders of Currency Zone's Two Largest Economies, at Odds Over Rescue Plans, Say No Pact Possible by Sunday Deadline

The Wall Street Journal

BERLIN—Europe's efforts to deliver a comprehensive plan to resolve the euro-zone debt crisis were in danger of unraveling Thursday as disagreement between Germany and France over virtually every point forced the 27-nation bloc to concede a much-anticipated summit of European Union leaders on Sunday won't produce an agreement.

The leaders of the euro zone's two largest economies are key to any deal on addressing the nearly two-year-old sovereign-debt crisisFrench President Nicolas Sarkozy and German Chancellor Angela Merkel on Thursday issued a statement saying no decisions could be made by EU leaders by Sunday and promising to produce a comprehensive plan at a second EU summit to be held by Wednesday at the latest.

As a concerted European response to the crisis seemed as uncertain as ever, Greek workers again took to the streets in protest austerity measures, and international inspectors warned Greece's economy is too weak to sustain its massive debt load.

Mr. Sarkozy and Ms. Merkel said the Greek authorities "need to make ambitious commitments" to address the situation in their economy under a new program, and also called on private-sector creditors to "immediately" begin discussions on what role they can play to alleviate the nation's debt burden. Olli Rehn, European commissioner for economic and monetary affairs, told The Wall Street Journal in an interview that it would be weeks before Europe could agree on a deal to restructure Greece's debt and that there were significant differences over how to maximize the firepower of the €440 billion ($605 billion) euro-zone bailout fund, known as the European Financial Stability Facility, or EFSF. Mr. Rehn said EU leaders need to overcome their differences and make key decisions to resolve the crisis.

"We still have some issues that are in need of convergence," he said. "We need to agree on the principles and key parameters over the weekend." Political differences rather than technical complexity appear to be playing the major role in preventing resolution of a range of issues that include shoring up European banks against financial contagion, making the euro-zone bailout fund a more effective defense in the crisis, and restructuring Greece's debt to allow the country to rebuild its economy.

A draft of guidelines for the euro zone's bailout fund that was presented to German lawmakers, and seen by the Journal, showed that Europe had made some progress in working out the details of a July agreement to expand the fund and make it more flexible. The guidelines outline how the EFSF would purchase sovereign debt directly from countries issuing new bonds or on the open market. Purchase of sovereign debt on open markets would require a speedy application to and approval from the Eurogroup Working Group and the EFSF Board, meaning decisions could be made quickly by EU bureaucrats rather than in a complex political process. There would be limited public disclosure of the bond buying, with the volume of purchases, structure and tactics decided in secret by a subcommittee of the Eurogroup.

The bond-buying powers would help the fund become a more effective instrument, but many experts believe the EFSF is too small to combat the crisis. The guidelines show clearly that Europe is still far from agreeing on whether to leverage the fund's assets to increase its capacity to intervene in the market. Some countries, such as France, believe the best solution is to transform the EFSF into a bank to allow it to borrow directly from the European Central Bank. But Germany opposes this idea, and many experts say it would violate European law.

A plan under discussion—as policy makers seek what Mr. Rehn described as the "best of the second-best models"—is to empower the fund to insure a portion of new debt issued by weakened euro-zone countries that would otherwise find it difficult to sell debt on the open market. The goal would be to protect euro-zone countries from the effects of a Greek default.

Less than a week ago, France and Germany appeared to agree to pursue the bond insurer model. But on Wednesday France was again advocating giving the EFSF a banking license. "At the moment, several variations are under discussion that would allow partial insurance of future debt of endangered euro zone countries," Steffen Kampeter, Germany's deputy finance minister, wrote in a letter to lawmakers. "But it is still an open question whether and in what form this kind of improvement of the efficiency [of the fund] will be adopted in the guidelines."

Pressure for a pact is rising as Greeks protest austerity measures, making it harder for Athens to comply with targets set by the so-called troika, a commission set up by the International Monetary Fund, the European Commission, and the ECB. A draft of the troika's latest report, circulated in European capitals on Thursday and seen by the Journal, said the Greek economy contracted by about 6% in the first half of 2011, more than previously forecast. Fiscal reforms, from tax increases to privatization of state assets, were having little impact on helping the Greek economy sustain its debt burden."Compared with the outlook of a few months ago, the debt sustainability has effectively deteriorated," the report said.

The troika nevertheless recommended Europe pay the next €8 billion tranche of aid for Greece, which is in danger of not being able to pay its bills in November.

—Andreas Kissler and David Gauthier-Villars contributed to this article.

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