EU Leaders Plot Joint Response to Avert Financial Meltdown

EU leaders will hold an emergency summit tomorrow in Paris to try and draw up a coordinated response to the threat of meltdown among European banks.

They will meet at the Élysée palace after being warned by a group of leading economists that without a common response, Europe could be faced with a 1930s-style depression, putting the savings of hundreds of millions of people at risk and destroying millions of jobs and businesses.

But it was clear last night that there is no consensus among the leaders about what action to take and they have rejected a French-inspired idea of following the US and creating a "Euro-tarp" or troubled asset relief program [bail-out].

That could have been worth €300bn (£235bn) compared with the $700bn (£396bn) Paulson plan. But one senior Brussels official said: "It's dead, fini, kaput." Jean-Claude Trichet, president of the European Central Bank, said it simply did not fit the political structure of a non-federal EU. Gordon Brown, Angela Merkel, the German chancellor and Silvio Berlusconi, Italy's prime minister, and their host, French president Nicolas Sarkozy, are most likely to endorse a scheme to earmark national reserves that could be injected as public equity into failing banks.

Jan Peter Balkenende, the Dutch prime minister, said after talks with Sarkozy in Paris that the reserve could amount to 3% of each country's GDP, compared with 5% in the US plan. "If you put that together, it's a lot of money," he said.

The putative French suggestion for a EU-wide bail-out was first floated on Wednesday by Christine Lagarde, the French finance minister, in an interview with the German business daily Handelsblatt. But hours later she told BBC Newsnight no such plan existed.

Sarkozy also denied the idea of a Euro-tarp. "I deny both the price and the principle," he said.

The French president got short shrift from Brown and Merkel, both of whose governments have been involved in national bank rescues - Northern Rock and Bradford & Bingley in the UK and IKB, Sachsen LB, West LB and Hypo Real Estate in Germany.

Merkel told Bild-Zeitung yesterday: "The federal government cannot and will not write a blank cheque for all banks, irrespective of whether they behave responsibly or not."

Jean-Claude Juncker, Luxembourg's prime minister who will attend the Paris summit, told German radio: "I see no reason why we should mount a US-style program in Europe." He said the crisis came from the US and was deeper there.

That is a view shared by leading German politicians who slapped down Deutsche Bank's chief Josef Ackermann when he also floated the idea of a Euro-tarp.

The ECB has already injected hundreds of billions of euros into the banking system. After voting unanimously yesterday to keep interest rates on hold at 4.25%, Trichet gave the broadest of hints that its contribution to the weakening EU economy would be to cut rates, perhaps as early as next month if the crisis deepens or certainly in the new year.

He will also attend the summit, but refused to say what he expected the result to be. Welcoming recent rescues of banks such as Fortis and Dexia, he told the monthly ECB news conference that "in exceptional cases where financial stability is at stake," it was the duty of national governments to intervene.

But he also criticised banks for over-reacting to the credit squeeze and exacerbating it by refusing to lend to each other. "They were not pricing risk before the financial turmoil and now, in some cases, we have the reverse phenomenon: the pendulum has swing too far the other way. I call upon them to keep their composure," he said.

That call for calm is likely to be one outcome of the summit, which will also be attended by José Manuel Barroso, the European commission's president, who met leading commercial bankers for dinner last night. Among them were the heads of pan-European banks such as RBS, HSBC, BNP and UBS.

Barroso, who speaks on behalf of smaller EU countries not at the summit, has spearheaded the Brussels plans for stricter, pan-European regulation of banks to counter systemic risk, reform of credit ratings agencies and new accounting rules to evaluate complex financial products.

He also favors upgrading the current deposit guarantee scheme, which safeguards a minimum of the first €20,000 of savings , and a far speedier payout, which would bring it closer to the 48 hours in the US. The summit will also endorse plans for curbing excessive boardroom pay and linking it to performance.

EU leaders notoriously fail to live up to promises of concerted action and usually end up squabbling. But the call from 10 leading economists urges an EU-wide recapitalization of banks through the injection of public equity or mandatory debt-to-equity conversions. "Unless Europe's leaders immediately unite to address this crisis head-on ... they may find themselves fighting over ... the aftermath," the economists said.