Greek debt: Europe at the crossroads

Sarkozy and Merkel agree last-ditch compromise in desperate bid to avert catastrophic default

Faced with the looming threat of global economic meltdown, the leaders of Germany and France buried their sharp differences over the worsening Greek debt crisis yesterday and issued an urgent call for EU agreement on a new rescue package for the financially stricken country.

Chancellor Angela Merkel and President Nicolas Sarkozy made their appeal after a three-hour meeting in Berlin to discuss the crisis as the Greek Prime Minister reshuffled his cabinet in an effort to show that his government could face down the political calamity provoked by his country's economic woes.

Insisting that both she and Mr Sarkozy wanted European agreement on a new rescue package for Greece at the EU leaders' summit at the end of next week, Ms Merkel said: "We have to find a solution as soon as possible. We have spent the whole of May and most of June discussing the same problem without reaching agreement."

In an effort to calm the markets, both leaders pledged their support for the government of George Papandreou. "I have spoken to him on the phone, he is ready to fight. I am very confident that Greece can master the crisis," Ms Merkel said.

Greece needs an urgent instalment of €12bn from its €110bn emergency loan granted last year to avoid defaulting on debts due for repayment over the coming months.

A fresh loan now being discussed by the eurozone could be worth as much as €100bn. While that appears to be a staggering amount, analysts believe that while the total cost of a full-scale Greek default is incalculable, domestic financial systems in Europe would be severely affected. French banks hold Greek debt worth €56bn, the German exposure is €34bn, but the real fear lies in the unknown.

Yesterday's Franco-German summit had been preceded by major differences between the two countries. Ms Merkel had insisted that as part of any long-term solution, the banks should be obliged to buy back some of their loans to allow Greece more time to pay. But France strongly objected, arguing that it could destabilise its own banking industry. News of the German plan prompted the ratings agency Moody's to lower the credit rating this week of the three largest French banks – Crédit Agricole, BNP Paribas and Société Générale.

Ms Merkel and Mr Sarkozy appear to have buried the hatchet. They jointly announced that any private sector involvement should be voluntary. "We will do everything to sustain and support the euro," Ms Merkel insisted, in what appeared to be a climbdown on her part. "We want the involvement of private investors to be completely voluntary and the conditions must be worked out jointly with the European Central Bank."

Mr Sarkozy described her change of heart as a "breakthrough". He insisted: "France and Germany hold the same position on the Greek question." Their comments caused the euro to bounce back and strengthen against other currencies yesterday.

Germany's hitherto uncompromising stance was provoked by widespread domestic discontent over the Merkel government's handling of successive eurozone crises. Ms Merkel's administration has been portrayed in mass-circulation newspapers as a government which forces ordinary German taxpayers to come to the rescue of "failed" countries like Greece.

Yesterday,it emerged that Germany's reluctance to provide more financial aid for Athens had prompted the eurozone head, Jean-Claude Juncker, to intervene personally on Greece's behalf. Mr Juncker described the proposals to force private banks to get involved as "dangerous". He added: "This could provoke the most serious risk that all three rating agencies will declare a credit event. Then there are big risks of contagion for other countries."

Mr Juncker also dismissed proposals to wait until September before agreeing on an aid package for Greece. "We simply cannot allow this," he told Berlin's Der Tagesspiegel newspaper.

Mr Papandreou's failure to secure a government of national unity meant that he was forced yesterday to turn to his main political rival in the ruling Socialists, Evangelos Venizelos, to shore up the government.

A veteran of Greece's bitter internecine politics, Mr Venizelos, who was appointed Finance Minister, effectively assures the Prime Minister the internal support he will need to pass the new package of austerity measures that he failed to get through parliament earlier this week.

"The country must be saved and it will be saved," said Mr Venizelos, who moved from Defence. "I am leaving defence today to go to the real war."

The outgoing Finance Minister was among a number of technocrat outsiders – new faces brought in by Mr Papandreou to "completely change" Greek politics – and his departure marks the end of that effort and the return of old party heavyweights from the Socialists' compromised past.

While Mr Papandreou struggled to put a positive spin on the reshuffle, talking of "encouraging growth", it was clear he had to turn to the old guard in order to secure their support for the second wave of austerity measures required by the IMF and the EU.

In the short term the new Finance Minister should see party dissenters come back into line and get the government through a no-confidence motion in parliament early next week, but analysts expect him to try to oust his boss from the leadership at elections that would likely follow the passage of the new austerity measures.

Crisis in Greece

The violence

Demonstrators clashed with riot police, when more than 20,000 took to the streets of Athens to protest against the government's proposed austerity measures

The sacrifice

Later, the Greek PM George Papandreou appeared on television to announce that he was to form a new government to push through a new financial package

The deal

As part of the deal, Papandreou promoted his fierce political rival Evangelos Venizelos to the role of Finance Minister in a desperate bid to help push through austerity measures

The rescue?

German Chancellor Angela Merkel and French President Nicolas Sarkozy met in Berlin after their governments disagreed publicly over the steps needed to stabilise the ailing Greek economy

VIDEO
Arts & Entertainment
Ricky Gervais at a screening of 'Muppets Most Wanted' in London last month
tvRicky Gervais on the return of 'Derek' – and why he still ignores his critics
Sport
Luis Suarez of Liverpool celebrates his goal
sport
Arts & Entertainment
Homer meets Lego Marge in the 25th anniversary episode of The Simpsons, set to air on 4 May
tv
Arts & Entertainment
James Franco and Chris O'Dowd in Of Mice and Men on Broadway
theatreReview: Of Mice and Men, Longacre Theatre
Life & Style
Infant child breast-feeding with eyes closed
healthTo stop mummy having any more babies, according to scientists
News
news
Arts & Entertainment
film
Life & Style
Going down: Google's ambition to build an elevator into space isn't likely to be fulfilled any time soon
techTechnology giant’s scientists say there is no material strong enough for a cable from Earth into orbit
News
David Cameron sings a hymn during the enthronement service of The Most Rev Justin Welby as Archbishop of Canterbury, at Canterbury Cathedral last year
news
Life & Style
From long to Jong: Guy Pewsey gets the North Korean leader's look
fashionThe Independent heads to an Ealing hairdressers to try out the North Korean dictator's trademark do
Extras
indybest10 best smartphones
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Apprentice IT Technician

£150.00 per week: QA Apprenticeships: This company is a company that specializ...

1st Line Technical Service Desk Analyst IT Apprentice

£153.75 per week: QA Apprenticeships: This company is an innovative outsourcin...

1st Line Helpdesk Engineer Apprentice

£150.00 per week: QA Apprenticeships: This company has been providing on site ...

Sales Associate Apprentice

£150.00 per week: QA Apprenticeships: We've been supplying best of breed peopl...

Day In a Page

Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit
Westminster is awash with tales of young men being sexually harassed - but it's far from being just a problem in politics

Is sexual harassment a fact of gay life?

Westminster is awash with tales of young men being sexually harassed - but it's far from being just a problem in politics
Moshi Monster creator Michael Acton Smith: The man behind a British success story

Moshi Monster creator Michael Acton Smith

Acton Smith launched a world of virtual creatures who took the real world by storm
Kim Jong-un's haircut: The Independent heads to Ealing to try out the dictator's do

Our journalist tries out Kim Jong-un's haircut

The North Korean embassy in London complained when M&M Hair Academy used Kim Jong-un's image in the window. Curious, Guy Pewsey heads to the hair salon and surrenders to the clippers
A History of the First World War in 100 moments: A forgotten naval victory in which even Nature played a part

A History of the First World War in 100 moments

A forgotten naval victory in which even Nature played a part
Vespa rides on with launch of Primavera: Iconic Italian scooter still revving up millions of sales

Vespa rides on with launch of the Primavera

The Vespa has been a style icon since the 1950s and the release this month of its latest model confirms it has lost little of its lustre
Record Store Day: Independent music shops can offer a tempting alternative to downloads

Record Store Day celebrates independent music shops

This Saturday sees a host of events around the country to champion the sellers of well-grooved wax
Taunton's policy of putting philosophy at heart of its curriculum is one of secrets of its success

Education: Secret of Taunton's success

Taunton School, in Somerset, is one of the country's leading independent schools, says Richard Garner
10 best smartphones

10 best smartphones

With a number of new smartphones on the market, we round up the best around, including some more established models
Mickey Arthur: Aussie tells ECB to stick with Ashley Giles

Mickey Arthur: Aussie tells ECB to stick with Ashley Giles

The former Australia coach on why England must keep to Plan A, about his shock at their collapse Down Under, why he sent players home from India and the agonies of losing his job
Homelessness: Why is the supported lodgings lifeline under threat?

Why is the supported lodgings lifeline under threat?

Zubairi Sentongo swapped poverty in Uganda for homelessness in Britain. But a YMCA scheme connected him with a couple offering warmth and shelter
A History of the First World War in 100 Moments: When the world’s biggest shed took over Regent’s Park

A History of the First World War in 100 Moments

When the world’s biggest shed took over Regent’s Park
The pain of IVF

The pain of IVF

As an Italian woman vows to keep the babies from someone else’s eggs, Julian Baggini ponders how the reality of childbirth is often messier than the natural ideal