The leaders will discuss how best to resolve the eurozone debt crisis
9 October 2011 Last updated at 16:28
French President Nicolas Sarkozy is visiting Berlin to discuss differences with German Chancellor Angela Merkel over the eurozone debt crisis.
Probable topics on the agenda are Greece, strengthening banks and how to prevent the crisis spreading.
They are also likely to discuss Franco-Belgian bank Dexia, Europe’s first bank to fall victim to the debt crisis.
On Sunday, the governments of France, Belgium and Luxembourg said they had agreed a plan to rescue the bank.
“The proposed solution, which is the result of intensive consultations between all involved parties, will be submitted to the Dexia board, whose responsibility it is to approve the plan,” a joint statement said.
The board is meeting this afternoon.
Both Mr Sarkozy and Mrs Merkel have met with visiting IMF chief Christine Lagarde in recent days.
Ms Lagarde visited the French leader in Paris on Saturday and was in Berlin to see the chancellor on Thursday, when the two women were joined by World Bank chief Robert Zoellick.
President Sarkozy is expected in the German capital on Sunday afternoon.
Germany and France have differed over how to recapitalise Europe’s banks, said by some to require between 100bn (£86bn; $134bn) and 200bn euros to withstand the sovereign debt crisis.
Paris is believed to want to use the eurozone’s bailout fund – the European Financial Stability Facility (EFSF) – to recapitalise its own banks, while Berlin is insisting the fund should be used as a last resort.
Another key dispute is how to use the EFSF to buy sovereign debt. France does not want to set guidelines but Germany would like to limit the sum used for each member state and set a time limit for bond purchasing, according to German newspaper Handelsblatt.
On Sunday, “Dexia will be among the topics that will be discussed but the main topic is Greece and the eurozone, as banks are only a consequence [of the crisis]“, a source at the French finance ministry told Reuters news agency.
Last week, Belgian and French finance ministers announced plans to siphon off Dexia’s riskiest assets into a “bad bank” and remove its French local government lending operations, as fears grew that it might collapse due its large holdings of Greek government debt.
French banks are seen by analysts as over-exposed to Greek, Italian and Spanish debt, and leaders want to prevent any new, bigger reduction in Greece’s debt which might trigger a banking crisis across Europe.
“We must ensure that the banks have sufficient capital” to prepare for a possible further reduction, German Finance Minister Wolfgang Schaeuble told the Frankfurter Allgemeine Zeitung (FAZ) newspaper.
In July, leaders agreed that private lenders should take a hit if Greece is forced to default on its debts. However, the cut of 21% proposed could “perhaps” be insufficient, Mr Schaeuble said.
Talks are continuing over the latest bailout tranche for Greece, which could run out of cash as soon as mid-November.
The European Commission, the European Central Bank and the IMF are currently deciding whether to release about 8bn euros to help the Greek government pay its bills.
This is money from the original 110bn euro bailout agreed last summer. Another 109bn euro bailout was also agreed by European leaders in July, but this has yet to be ratified.
Despite efforts by leaders to contain the crisis, there is little evidence that its end is nearing, analysts say.
“There is a high risk that this crisis further escalates and broadens,” the German finance minister said.
On Friday, the international ratings agency Fitch downgraded the sovereign credit ratings of Italy and Spain, and another agency, Moody’s, downgraded 12 banks in the UK and nine in Portugal.
Plans to expand the EFSF, and give it greater powers, were also agreed in July and have been ratified by most national parliaments. Slovakia will vote on the proposals this week.
However, these plans are now seen as inadequate and leaders have said they hope to announce new measures at a G20 meeting in Cannes at the beginning of November.