The conspicuous austerity plan adopted last week by Germany displeased many EU member states, which fear that Berlin could gain an excessive competitive advantage at a time when it should be helping members of the bloc that are lagging behind instead.
Such concerns have been raised by Mediterranean countries in particular and are echoed by France, whose historical relationship with Berlin seems to be at a low point.
In a clear sign of the difficult relationship between French President Nicholas Sarkozy and Angela Merkel, another meeting between the two was "postponed" for unclear reasons last week. Indeed, it was not the first time that the two leaders have displayed their tensions so openly either (EurActiv 19/04/10).
A joint letter which Sarkozy and Merkel addressed to the European Commission ahead of the summit, calling for decisions on short naked selling and Credit Default Swaps (CDS), seems to be "the only thing on which they agree on," a European diplomat said, explaining that this show of coordination on a relatively marginal issue hides deep divisions over much more significant dossiers (EurActiv 09/06/10).
"These rumours are completely out of proportion. There has always been very strong cooperation between Germany and France," said a German government source in Brussels.
As for the austerity plan, the diplomat said "the general line pushed forward by the European institutions is that we all have to make savings. We want to make clear that we care about obeying the rules of the Pact. Otherwise we cannot ask others to do it".
He acknowledged, however, that as a consequence of the German austerity plan, spreads between interest rates on German bonds and the sovereign bonds of other eurozone members could widen again. "But this is because Germany might pay less interest rates, rather than others pay more," he said.
Attacks on German draconian measures to cut the country's budget deficit are seen by many as a consequence of the new mood towards Chancellor Merkel, whose controversial approach to the Greek crisis has been prolonging Athens' tribulations for months, depressing the entire euro zone.
EU dissent over Merkel's hard line has resurfaced ahead of the EU summit, which takes place on Thursday (17 June).
Both permanent EU Council President Herman Van Rompuy and European Commission President José Manuel Barroso clearly told the chancellor in bilateral meetings held last week that they oppose the idea of new institutions and changes to the treaties to make the Stability Pact more effective as she had proposed.
"We do not need new institutions to meet our goals. We need more effectiveness," said Van Rompuy in a statement issued after meeting the chancellor.
Task force to reform the Stability Pact
Discussions on recent German moves and requests are likely to dominate the EU summit in an informal and bilateral way.
But according to the official agenda of the meeting, leaders will instead listen to the first preliminary report delivered by Van Rompuy on the results of a task force designed to strengthen the Pact. The task force has already met twice, although its usefulness is still being questioned as it is an exact replica of the Economic and Monetary Affairs Council (Ecofin).
The possibility of introducing regular European coordination of national economic policies will be analysed at the summit, with the UK remaining sceptical. In any case, it remains to be seen what kind of so-called 'peer review' is possible. There is no consensus around checking and coordinating in detail annual national budget laws, as proposed by the European Commission. Instead some are advocating controls on general indicators, which are yet to be defined.
Ministers are certain to reiterate the necessity of increasing surveillance not only of deficits, but also debt levels and the competitiveness of member states. Penalties and incentives to encourage virtuous behaviour will be discussed.
Bank levy under scrutiny
The summit will be a key opportunity to define a final EU position ahead of the Toronto G20 meeting, scheduled for the end of June.
Many EU states have been on the front line of calls to introduce more stringent regulation of financial markets, but have found only low support among G20 partners.
One of the most controversial proposals is a bank levy, to be imposed as insurance against possible future defaults in the banking sector. "It's one of the rare cases in which we have Germany, France and the UK on the same side," remarked an EU diplomat.
However, unanimous EU support is far from guaranteed, especially because the most industrialised non-EU countries are showing little support for such a measure.
"It's clear that imposing a bank levy only at European level could pose an extra burden on European banks, favouring international competitors," remarked a European diplomat.
Leaders will have to decide on Thursday if they want to go ahead with a bank levy alone, or if they will dump the initiative in the absence of wide international support.
