Debt Crisis: Crunch time for Eurozone as Sarkozy and Merkel hold talks
THE leaders of France and Germany will hold crunch talks in Paris today amid frantic efforts to agree a deal to stabilise the eurozone.
The talks between the leaders of Germany and France are hoped to tie together a financial rescue package of up to €2 trillion, via the European Central Bank, the IMF and the European Financial Stability Facility (EFSF), ahead of a final summit of all European leaders on Friday.
Monday's Paris "work lunch" between Mrs Merkel and Mr Sarkozy is intended to settle differences between the two core members of the single currency about how a fiscal union might work.
Both leaders agree that ultimately some nations, including those with excessive debts such as Italy and Spain, will have to sacrifice some independence on setting national budgets in exchange for financial support from their wealthier counterparts.
Italy's cabinet last night adopted a new €30bn austerity programme in order to ease the pressure on the embattled country.
The "grand European bargain" envisaged by Mrs Merkel will involve a framework of automatic penalties and oversight through a new "stability commissioner" to keep countries in check.
So far, France has resisted calls for such severe policing, which it argues could lead to an undemocratic transfer of national sovereignty. Mr Sarkozy has argued that euro members should be granted more discretion over the sanctions.
Both Mrs Merkel and Mr Sarkozy seem to believe their plan can be achieved with protocols rather than treaty changes. Mario Draghi, president of the European Central Bank, said a pact between the duo was "the most important element to start restoring credibility".
If the pair fail to reach an accord, many will doubt a plausible rescue plan will be deliverable in time for Friday's summit.
Last week, financial markets rallied on the prospect of such a resolution, after Mr Draghi suggested that in response to a new "fiscal compact" the central bank could act more decisively to fight the crisis. Italian 10-year sovereign debt traded below the crucial 7pc level and Spanish yields similarly eased.
Mr Draghi signalled that if the leaders can cement fiscal checks, the bank may unveil further market interventions at this Thursday's rate setting meeting.
European finance ministers finally gave the go-ahead to an expansion of the European Financial Stability Facility last week, although many fear that with the vehicle already struggling to raise cash in the capital markets, it no longer has the firepower necessary to support Italy and Spain.
The latest idea under discussion involves the ECB lending cash via its member national central banks to the International Monetary Fund, which in turn would use the cash to support struggling euro states. The hope is that this would circumvent an ECB ban on buying government debt, bolstering the EFSF's ammunition.
But while the combined plans might push the size of a total package which might be unveiled on Friday to €2 trillion, there are suspicions that investors will remain sceptical.
Olli Rehn, EU Economic and Monetary Affairs Commissioner, said: "This week, the stable future of the euro and thus the economic recovery in Europe and employment are at stake."
Portuguese Prime Minister Pedro Passos Coelho said failure to find a solution to the eurozone crisis could lead to the end of the European Union.