MARSEILLE, France — The leaders of France and Germany hoped to rally fellow European conservatives on Thursday around their latest bid to save the euro currency from collapsing under the weight of huge state debt.
German Chancellor Angela Merkel and French President Nicolas Sarkozy were meeting with heads of state and government from the center-right European People’s Party in this Mediterranean port before moving on to Brussels for a crucial EU summit, with the 17-nation eurozone’s fate in the balance.
The Merkel and Sarkozy will try to build support for their plan for eurozone nations to submit their national budgets to much greater scrutiny. Ratings agency Standard & Poor’s injected urgency into those talks by warning it may downgrade the bonds of all 27 EU nations.
The two leaders’ plan seeks to enshrine tougher budget oversight in the existing EU treaty or alternatively, by creating a new one for the 17 eurozone nations that others could opt in to. It proposes automatic sanctions for breaking rules and a requirement to balance national budgets.
Arriving at the meeting European Commission President Jose Manuel Barroso tried to project optimism that a deal to save the euro was in reach.
“I believe this is possible. My appeal — my strong appeal — to all the heads of state and government is to show this commitment to our common currency. I think this is indispensable, and leadership is about making possible what is indispensable,” Barroso said.
Markets have mostly risen since last week on hopes that an agreement among European governments on the Franco-German plan would pave the way for the European Central Bank to intervene more aggressively to support eurozone bond markets.
However, investor optimism was deflated somewhat on Wednesday, when a German official said it could take up to Christmas to clinch a deal.
The head of the eurozone finance ministers said Thursday that leaders hope to get all 27 European Union countries on board with the treaty changes outlined by Sarkozy and Merkel this week.
“A treaty of all 27 members is to be hoped for, but if there are countries that don’t want to accompany us in our search for a better European architecture then we’ll go with a treaty of 17,” Jean-Claude Juncker, the Luxembourg finance minister, said in an interview on French radio France-Info.
Analysts said the summit was do-or-die for the eurozone.
“The politicians face a very stark choice between reaching an agreement that tees up the ECB to continue buying (bonds) and helping to restore confidence generally by their words and actions, or failing to agree and risk losing control of the situation which could lead to a depression or worse,” said Gary Jenkins of London’s Evolution Securities.
Investors will keep a close eye later in the day on the monthly policy statement of the European Central Bank and the subsequent press conference. The markets expectations’ are that the ECB will cut its key interest rate again, by as much as half a percentage point.
ECB President Mario Draghi is unlikely to declare any significant increase in support for bond markets, having stated that an agreement between leaders on tightening spending controls is a pre-requisite.
An alternative to support from the ECB could be greater help from the International Monetary Fund. Some European leaders have said that their national central banks could lend money to the IMF, which could act as a backstop for financially weak eurozone countries.
Prime Minister Jyrki Katainen of euro member Finland told The Associated Press he’s “more optimistic” than just a few days ago that such an arrangement with the IMF can be agreed at the summit.
“I’m interested in discussing this topic again (in Brussels), and whether the EU 27 could add resources to the IMF and if the BRIC countries could add some resources to the IMF, and the IMF could lend some money — conditionally — to those who need it,” he said. The BRIC countries are Brazil, Russia, India and China.
Failure to reach a political deal that could free up the ECB to intervene would likely trigger chaos on financial markets, potentially tearing apart the euro currency and destabilizing the global economy.
U.S. Treasury Secretary Timothy Geithner says reforms to deal with the debt crisis are “vital” but admitted that implementation will take some time.
Geithner was in Milan to meet Italian Premier Mario Monti, part of a three-day trip across Europe to press the region’s leaders to solve their differences over how to ease the crisis.
S&P highlighted the urgency of the situation when it said it may downgrade the triple A rating of the 27-nation European Union.
In a statement, the ratings agency said it was placing the EU’s AAA long-term rating on so-called CreditWatch negative.
S&P said it could cut the entire EU’s long-term credit grade by one notch if it were to downgrade one or more members of the region’s biggest countries.
It hopes to conclude its assessments on the eurozone countries as soon as possible after the Friday summit. Following this, it expects to resolve its action on the EU as a whole.
Certain provisions in the Franco-German proposal, such as setting automatic penalties for countries that overspend, are controversial and have the potential to delay an agreement.
The eurozone leaders face a double dilemma of trying to sort out their own intractable debt woes, while striving not to alienate the 10 EU countries that don’t use the common currency.
British Prime Minister David Cameron is wary Britain might lose influence in Europe if France and Germany create a tighter club of eurozone nations, and fears a dilution of Britain’s decision-making powers to Brussels.
Among other things, the French-German plan would streamline the eurozone’s future (euro) 500 billion ($669 billion) permanent bailout fund by suggesting that a majority of countries who hold 85 percent of the ECB’s capital should be sufficient to make all decisions. That would give the bloc’s six biggest economies the power to outvote the remaining 11 nations, a move that is likely to be opposed by smaller countries.