Franco-German friction a worry for eurozone

PARIS - Troubled by dysfunction in the Franco-German alliance, European leaders head towards a summit on Friday where they will face the next step in the challenge to cure their economies, defend the euro and restore Europe's global standing.

The one-day summit in Brussels will see the 27 nations of the European Union ponder how to tighten belts and boost revenues without sparking domestic unrest or launching the nightmarish task of revising EU treaties.

Ambitious proposals are on the table, including the idea of a European-wide levy on banks to make them bear the cost of financial crises, and policing the euro-zone so that its single currency is not undermined by spendthrift governments.

The summit comes on the heels of a €750 billion (US$1.3 trillion) emergency bailout that leaders threw together to support Greece, the first in a feared domino line of euro economies targeted by speculators.

Breaking through on these issues would re-establish the EU as a player ahead of the June 26-27 summit in Toronto of the 20 biggest economic powers, where the world's financial system will come once more under scrutiny.

But divergence among the 27 EU nations remains deep, and it has been further complicated by friction within the Franco-German alliance which traditionally drives European policy.

Tensions between President Nicolas Sarkozy of France and German Chancellor Angela Merkel have never been far from the surface since their political relationship began three years ago.

On a personal level, Sarkozy is said to be irritated by the cautious, dumpy Merkel, and Merkel irked by the Frenchman's backslapping and grandstanding.

Carefully masked or dismissed as media froth, these differences last week appeared to leap out into the open with a diplomatic ruckus over a summit in Berlin.

Sarkozy and Merkel had been scheduled to hold a dinner in Berlin, pursuing a long-held tradition whereby France and Germany meet to agree on a joint position at upcoming EU summits.

But to widespread astonishment, the dinner was postponed at the last minute. The announcement came so late that Sarkozy's security detail and the French press corps had already arrived in the German capital.

French diplomats said the postponement was suggested by Merkel, who was embroiled in tough domestic talks on an austerity package. But the Chancellor's office said the postponement was "at France's initiative".

Both sides insist their relationship is fine and say the dinner will take place today. But in what seems a rather forced show of their mutual affection, the pair have already revealed the intended outcome of their meeting.

It is a joint letter to European Commission President Jose Manuel Barroso, calling him to speed up plans for tighter financial regulation, including a ban on a speculators' tactic known as "naked short selling".

Publishing the letter "was not a trivial move", said France's junior minister for European affairs, Pierre Lellouche. "We had to show that France and Germany are working together. Separation is not an option."

It is hard to underplay the importance of the so-called Franco-German initiative in European politics. Over the last quarter-century, the two countries' dynamism has yielded the euro, the single European market and the "Schengen" zone, whose participating countries have eliminated all internal border controls.

Beneath the Sarkozy-Merkel tensions, say observers, lies not so much poor personal chemistry but a widening gap in economic philosophy.

Merkel, outraged by the statistical tricks and chronic overspending by Greece that brought the euro close to a bust, is clamouring for tougher rules and belt-tightening.

Her centre-right coalition is leading by example, planning savings of €30 billion over the next four years, mainly through unemployment benefits - and it is doing this in the teeth of deep unpopularity.

Sarkozy, just as disliked in the polls, is reining in some public spending and eliminating tax breaks. He argues that the way out of the crisis is by growth and it is Germany's role, as the biggest European economy, to stimulate demand.

"If we add austerity to austerity, we are going into recession," the French daily Le Figaro quoted Sarkozy as saying, in comments on Merkel's austerity package.

Lacking the steer from the two biggest European economic powers, the EU's hopes of emerging cleanly from the financial crisis are dimmed, say analysts.

In the grimmest prediction, a London-based consultancy, the Centre for Economics and Business Research, last week predicted the euro would fall to parity with the US dollar next year - if it has not broken up by then.