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France and Germany pledge to keep Greece within the eurozone


Commission president Jose Manuel Barroso at the economic
crisis debate at the Parliament in Strasbourg yesterday

Commission president Jose Manuel Barroso at the economic crisis debate at the Parliament in Strasbourg yesterday

Commission president Jose Manuel Barroso at the economic crisis debate at the Parliament in Strasbourg yesterday

France and Germany last night moved to dampen fears that Greece would be forced out of the euro -- saying they were "convinced" that it would stay inside the single currency.

The vote of confidence came after French President Nicolas Sarkozy and German Chancellor Angela Merkel held telephone talks with Greek Prime Minister George Papandreou.

Mr Sarkozy issued a statement following the call stating that he and Ms Merkel "are convinced that the future of Greece is in the eurozone".

The call and statement were aimed at calming fears that Greece would leave the euro following a default. The two leaders did not rule out a Greek default in their statement.

Europe's markets were closed by the time the news came but the euro rose against most currencies and share prices were lifted in the US.

During the call, Mr Papandreou reaffirmed a commitment to meet deficit-reduction targets that are a condition of international bailout loans.

Even if markets can be convinced that the euro will not break apart, there are renewed fears of a deepening financial crisis across the continent.

European finance ministers are due to meet tomorrow and have been warned in a confidential document of the danger of a renewed credit crunch. Documents obtained by Reuters reveal the risk of a "systemic" crisis in the eurozone as sovereign debt spills over to banks.

The report has been prepared for ministers meeting in Poland tomorrow and Saturday.

In a sign of the seriousness of the current crisis, US Treasury Secretary Timothy Geithner will fly into Europe to attend the meeting bringing a US perspective to the talks.

China also added its voice to US concerns over Europe's apparent inability to stop debt contagion spreading, while Indian and Brazilian officials said major emerging economies were discussing increasing their euro sovereign holdings.

In the briefing notes prepared for the meeting, senior EU officials say the single currency area faces a "risk of a vicious circle between sovereign debt, bank funding and negative growth".

"While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic," the influential Economic and Financial Committee said.

In an effort to meet that challenge, EC president Jose Manuel Barroso yesterday said that the EU executive would soon present options for issuing a common eurozone bond, despite fierce resistance in Germany.

Many in the money markets think joint debt issuance, pooling the borrowing power of weak and strong borrower countries much as the euro pooled the former European currencies, is the best way out of the crisis.

But there is strong political and legal opposition in northern European creditor countries to underwriting the debts of what are seen as profligate southern states, making euro bonds a remote prospect.

Mr Barroso, however, is insisting that closer union through mechanisms including euro bonds is the only way to reverse the negative cycle in financial markets.

"Today I want to confirm that the commission will soon present options for the introduction of euro bonds. Some of these could be implemented within the terms of the current treaty, and others would require treaty change," he said.

But he warned that such bonds, which face political and legal obstacles in Germany and other north European creditor states, were no silver bullet to end the crisis, and could only be part of a comprehensive plan.

(Additional reporting Reuters and Bloomberg)

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