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Merkel, Sarkozy hold talks amid euro crisis

By the CNN Wire Staff
October 9, 2011 -- Updated 2343 GMT (0743 HKT)
French President Nicolas Sarkozy and German Chancellor Angela Merkel speak to the media after meeting in Berlin on Sunday.
French President Nicolas Sarkozy and German Chancellor Angela Merkel speak to the media after meeting in Berlin on Sunday.
STORY HIGHLIGHTS
  • NEW: Quest: "This is a situation where the devil is in the details"
  • Sarkozy says he and Merkel are "on the same wavelength"
  • "Recapitalization" of banks is key, both leaders say
  • Merkel stresses the importance of the euro

Berlin (CNN) -- French President Nicolas Sarkozy and German Chancellor Angela Merkel presented a united front Sunday in the face of regional economic woes, but offered few details about how they would solve financial problems.

"We are on the same wavelength in making decisions," Sarkozy said, pledging along with his German counterpart to pursue a "recapitalization" of European banks.

"We will do this together with our German friends in full agreement. There is no prosperous economy if there are no stable, reliable banks," he said.

Sarkozy said detailed proposals were still in the works, but he stressed the importance of acting quickly -- before the upcoming G-20 meeting in Cannes, France.

"We need to contribute with a lasting and global solution. And this response is one that we (have) decided to respond to before the end of this month," Sarkozy said.

Merkel and Sarkozy -- the leaders of Europe's two largest economies -- met in Berlin amid fears that Greece will default on at least some of its debts, having warned it will run out of money this month.That will put pressure on the euro, the common currency used by Greece and 16 other European Union countries.

"We would like to reiterate the importance of the euro and the necessity to find the necessary answer for the involved countries," Merkel said Sunday.

"The decision of a joint government has been a very difficult one. It's visionary. But the decision of a joint currency is at the very foundation of that," she added.

The scarcity of details offered at Sunday's press conference may not be a coincidence, said Richard Quest, CNN's international business correspondent and host of "Quest Means Business."

"Anybody can agree on these banal generalities," he said. "This is a situation where the devil is in the details."

The unfolding situation is not merely an economic crisis, Quest said.

"It's an economic crisis leading to a political crisis of will to actually make the decisions and make them stick," he said.

"So far there's no serious plan on the table. If you listen to European officials, they talk about negotiating one. What the markets want is to actually see one," Quest said.

Merkel cheered European stock markets on Thursday, hinting that governments could inject cash into troubled banks.

Merkel said providing government money for European banks that are struggling with liquidity issues "is sensibly invested" if it's clear that such action is needed to prevent a broader financial crisis.

"We should not hesitate," she said, "because otherwise there will be far greater damage to our systems."

European banks have been struggling with fears about potential losses on government bonds issued by troubled European governments such as Greece. The threat of a so-called sovereign debt contagion has also led to a pullback in lending between banks.

The IMF recently estimated that European banks face an overall credit risk of up to 300 billion euros ($401 billion) stemming from bonds issued by Greece, Portugal, Ireland, Italy, Spain and Belgium.

Analysts suggest the euro will survive, but that tense times lie ahead.

"The system will hold together but it will not be a stress-free exercise. The benefits of keeping Europe and the euro together outweigh the risks over the long-term," said James Rickards, senior managing director at Tangent Capital Partners. "What's going on in Europe is classic brinksmanship."

Dan Dorrow, senior vice president of research at Faros Trading, an independent currency broker-dealer, agreed.

"The risk of someone leaving the euro is a small tail risk probability," Dorrow said.

Merkel and Sarkozy's meeting Sunday comes ahead of a meeting of finance ministers of the Group of 20 nations in France on Friday and Saturday.

Also Sunday, governments of Belgium, France and Luxembourg said they had agreed on a solution for the troubled Franco-Belgian Dexia bank -- pushed to the brink of collapse by sovereign debt and funding pressures.

A joint statement released by the governments Sunday did not give details about the solution, which it said would be submitted to the bank's board of directors for approval.

CNN's Irene Chapple, Ben Rooney and Maureen Farrell contributed to this report.

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