Hollande-Merkel Gulf Opens as 18th Euro Summit Tackles Crisis

French President Francois Hollande challenged Germany’s handling of the financial crisis as he headed to his first European Union summit with calls for joint borrowing and cash injections to struggling banks.

Hollande teamed with Spanish Prime Minister Mariano Rajoy to press for tonight’s meeting of EU leaders to break with German-dominated budget-cutting policies that have failed to stabilize the 17-nation euro area and led to speculation that Greece might be forced out.

France will “put all the ideas for growth and liquidity on the table,” Hollande told reporters in Paris before going to Brussels. “Europeans have to know where Europe is heading. There has to be political direction. Milestones have to be established and goals set.”

The summit, the 18th since Greece was convulsed by debt, takes place with market indicators showing mounting stress. The euro tumbled to a 22-month low against the dollar amid concern that divisions between France and Germany will frustrate the search for answers. European stocks fell by the most in a month. Yields on German five-, 10- and 30-year bonds dropped to records, as investors sought a haven.

On his ninth day in office, Hollande shifted the crisis- fighting optics by holding a pre-summit briefing with the leader of recession-wracked Spain, instead of coordinating with Germany’s Angela Merkel, head of Europe’s dominant economy.

The meeting of leaders of all 27 EU countries started at 7 p.m. The crisis in the euro area will come up only “at the very end,” EU President Herman Van Rompuy said in a pre-summit letter. He and other leaders plan press conferences tonight.

Pressure on Merkel

The French-Spanish tandem heaped pressure on Merkel, on the defensive at home after her party was routed in May 13 elections in Germany’s most-populous state and internationally after her hard line on deficits was drowned out by pro-growth appeals at last week’s Group of Eight meeting.

Arriving in Brussels, Merkel rejected joint borrowing, fueling concern that Germany and France, the EU’s traditional driving forces, are no longer on the same page in attacking the crisis under way since early 2010.

“I don’t think they represent a contribution to growth in the euro zone,” Merkel said of euro bonds. “The very similar interest rates that we had for many years led to serious distortions.”

The clash over euro bonds pits better-off countries led by Germany against France, Belgium, Italy, Luxembourg and peripheral countries relying on European aid or at risk of needing it.

ECB Role

Europe must chart a path to common borrowing, should consider enabling its rescue fund to borrow from the European Central Bank and ought to let the fund lend directly to troubled banks, Hollande said.

The latter appeal was coined for Spain’s Rajoy, who is seeking to tap European money to recapitalize banks without tying Spain to the same sort of conditions as Greece, Ireland and Portugal, the three countries drawing on international aid.

“Liquidity, sustainability and debt financing are three points that I am going to talk about,” Rajoy said at the French-Spanish press conference.

Spain is embarking on its fourth attempt in three years to shore up lenders saddled with about 184 billion euros ($233 billion) of what the Bank of Spain calls “problematic” assets. European governments are divided over whether to let the planned permanent rescue fund lend to banks directly, an EU official said yesterday.

Bond Purchases

The polemics leave the central bank as the first line of defense in a market panic, though a German-led faction on the ECB is against adding to the 212 billion-euro stockpile of government bonds it has amassed during the crisis.

Rajoy looked to the ECB to help bring down 10-year Spanish bond yields, which rose 12 basis points to 6.20 percent today. Spain pays 482 basis points more than Germany to borrow, an extra cost that Rajoy said will negate budget cuts. The risk premium reached a euro-era record of 490 basis points on May 17.

“Many countries are making big efforts to control public deficits and implement structural reforms,” Rajoy said. “What we can’t do is live with different funding costs from other countries.”

Hollande reframed the debate over Greece’s potential exit from the euro, saying it is the job of European leaders -- and not only Greek voters in next month’s election -- to make sure the country stays in.

Greek Commitment

Creditor countries are putting the onus on Greece to continue with budget cuts. Finnish Prime Minister Jyrki Katainen said today in Brussels that “the euro area has done what we have to do and now we are waiting for the Greek commitment.”

Greece’s June 17 balloting was triggered by the inconclusive outcome of a May 6 election, in which the surge of an anti-bailout party to second place denied a majority to the two parties that have dominated the country since the 1970s.

Next month’s revote looms as a referendum on whether Greece stays in the euro, since an Athens government that goes back on austerity would be cut off from the next installments of the 240 billion euros in aid pledged since 2010.

“The situation in Greece is very fragile,” Evangelos Venizelos, a former finance minister who now leads the Pasok party, said today in Brussels. He sought the support of Socialists like Hollande for “a consensual framework for the common interest of Greece and of the euro zone.”

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Patrick Donahue in Brussels at pdonahue1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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