- Germany and France are pressuring Italy to boost growth and reduce its huge debt
- Confidence in Italy's public finances is critical to relieving the debt crisis
- France and Germany are worried that Berlusconi is not taking tough enough measures
Germany and France have turned on Italy to demand further action to boost growth and reduce its huge debt, as leaders of the eurozone struggled to agree on how to boost their rescue fund to stop contagion in the sovereign debt markets before a Wednesday deadline.
Angela Merkel, the German chancellor, and Nicolas Sarkozy, French president, held tough talks with Silvio Berlusconi, at the start of the day-long summit in Brussels, insisting that he take more radical measures to restore the trust of investors.
Confidence in Italy's public finances is critical to preventing the spread of the Greek debt crisis across the eurozone, but France and Germany are worried that Mr Berlusconi is not taking tough enough measures.
"Italy is a big and important partner," said Ms Merkel, saying further structural reforms were essential. "Everything must be done for it to live up to its responsibilities."
The clash with Mr Berlusconi came as 27 European Union leaders negotiated the three pillars of a package aimed at stemming the crisis. They agreed on the need for European banks to find €108bn in new capital to persuade investors that they can withstand the pressures of the sovereign debt crisis.
On Sunday night, the 17 eurozone leaders debated without reaching a conclusion two potential models to expand the financial firepower of their €440bn European financial stability facility -- the eurozone rescue fund -- using financial engineering to leverage the core capital by up to five times.
One plan would set up a special fund to attract global investors, including potentially the IMF, that would buy Italian bonds and those of other troubled eurozone countries. The other, which could run in parallel, would guarantee against losses by bondholders. Ms Merkel and Mr Sarkozy warned that both plans involved technical complexity.
At the same time top-level officials were negotiating with a consortium of international banks to increase their contribution to a new rescue plan for Greece, to cut the country's debt burden. Without further cuts in repayments to bondholders, EU and IMF lenders will be saddled with €252bn in bail-out loans until the end of 2020, according to a confidential EU-IMF study. Negotiators said the two sides remained far apart on the size of any debt writedown.
The three elements of the package are supposed to be decided by twin EU and eurozone summits on Wednesday. Non-members of the eurozone, led by Britain, Poland and Sweden, insisted they come back to Brussels to sign off on the bank recapitalisation plan before the final eurozone summit.
Mr Sarkozy said there were "more long hours of discussion to come" before a final accord could be reached but expressed his absolute determination -- with Ms Merkel -- to produce "solid and durable" common proposals by Wednesday.
Yet Ms Merkel's and Mr Sarkozy's joint frustration with Mr Berlusconi was made dramatically clear at a joint press conference. Asked if the Italian prime minister had reassured them about his action to reduce his country's debt level, they looked at each other with wry smiles, casting their eyes to the ceiling.
"We are conscious of the responsibility of all the authorities in Italy," said Mr Sarkozy. Asked if she trusted Mr Berlusconi, Ms Merkel replied: "He is our interlocutor, and naturally we are relying on him."