Merkel and Sarkozy agree on plan to bolster Europe’s banks

Germany and France, the eurozone's two biggest economies, said they had reached an agreement to bolster Europe's beleaguered banking sector, amid growing concern over the debt crisis – but they refused to disclose any details.

German chancellor Angela Merkel and French President Nicolas Sarkozy said they would finalise the plan before the end of the month after first submitting proposals to European Union governments ahead of a summit on 17 October. "We are determined to do the necessary to ensure the recapitalisation of Europe's banks," Mrs Merkel said, following the talks in Berlin yesterday.

That "comprehensive response" will include a detailed plan on recapitalising the banks, the pair announced, but declined to say how much money would be required. The banks are believed to require between €100bn (£86bn) and €200bn to withstand the sovereign debt crisis. Experts believe European banks need more capital to withstand any government bond default by Greece. Analysts fear that a Greek default could cause a severe credit squeeze that would even threaten banks not exposed directly to Greece's debt because banks could be afraid to lend to each other.

"The economy needs secure financing to ensure growth," Mr Sarkozy said. "There is no prospering economy without stable banks," he said. "That is what is at stake." Chancellor Merkel did not provide details about how the recapitalisation would work, saying only that all banks across the eurozone would be measured by the same criteria in coordination with, among others, the European Banking Authority and the International Monetary Fund.

Any solution must be "sustainable," she added.

President Sarkozy said that the French-German accord on the proposals "is total".

As well as recapitalising European banks, the leaders also discussed how to achieve better economic coordination in the eurozone and dealing with Greece's debt problems.