European Leaders Split on Rescue Strategy

PARIS, Oct. 2 -- European governments struggled Thursday to find a joint strategy to contain a growing banking crisis before it collapses additional shaky institutions and inflicts further damage on credit-starved European economies.

The leading economic powers in the 27-nation European Union were split over whether to devise a Europe-wide approach -- a bailout fund was mentioned -- or let each nation tend to its own endangered banks. Their differences threatened to undermine an emergency summit scheduled for Saturday in Paris among the leaders of France, Germany, Italy and Britain to reassure European investors and guarantee that the financial system here stays solid.

The French president, Nicolas Sarkozy, called the summit in an attempt to get ahead of the crisis, which last week seemed confined to the United States but suddenly has loomed as a major European problem as well. The meeting was seen as a test of his leadership during France's six-month turn as head of the European Union. In addition, Sarkozy envisioned the summit as a platform to promote his proposal to gather leaders of the major industrial powers, including President Bush, before the end of the year to launch a rewrite of rules governing financial exchanges around the world.

The European Union is based on the principle that member countries seek common approaches to economic issues and that no government gives its companies and banks special advantages over competitors based elsewhere in the single market. But at times of crisis, issues of national sovereignty and the cries of home constituencies often come to the fore.

Emerging splits were on vivid display after a visit to Germany by the French finance minister, Christine Lagarde. After her talks with Chancellor Angela Merkel late Wednesday, the Reuters news agency reported that the two women discussed forming a $420 billion European bailout fund as a way to build confidence and guarantee against further bank collapses. The fund would be raised by contributions from E.U. governments proportionate to the size of their economies, the agency said.

Hardly had the news spread than the German finance minister, Peer Steinbrueck, said that Germany opposed the idea. Lagarde's spokesmen in Paris said she had not proposed such a plan, and suggested that it was just an idea, put forward by Dutch Prime Minister Jan Peter Balkenende during an earlier conversation with Sarkozy. By Thursday afternoon, Balkenende had called on Sarkozy again, telling reporters afterward that the whole thing was a misunderstanding.

"We are not convinced that an umbrella fund to cover everything would be a good solution," said Jeanette Schwamberger, a spokeswoman for the German Finance Ministry. "We believe that each case has to be decided upon and solved in an individual way. Sometimes it might be a case of liquidity, sometimes of solvency. So far, the answers in each case have been different from every other case."

Bert Van Roosebeke, an analyst at the Center for European Politics in Freiburg, Germany, said a fund would be a hard sell to voters. "German politicians would have a hard time explaining to their taxpayers why their money is bailing out a Spanish bank, for example, and vice versa," he said. "The concept of European solidarity is clearly not that far-reaching to cover such a plan."

But French officials, in conversations with Paris reporters, made it clear that Sarkozy favored some kind of European approach. Lagarde, while disowning specifics of the $420 billion plan, also was emphatic that go-it-alone was not the right solution and that Europe should come up with a common strategy at Saturday's summit.

"What would happen if a little European Union state confronted a bank collapse?" she asked in an interview with Handelsblatt, the German financial daily. "Maybe the government would not have the means to save the institution in question. So the question arises of a solution at the European level."

Belgium, the Netherlands, Luxembourg and the European Central Bank were also pushing for common European measures, reports in Paris said, while Germany and Britain were said to be cool to the idea. The Italian position was unclear.

Christopher Allsopp, a senior economics research fellow at Oxford University and former member of the Bank of England's Monetary Policy Committee, said any European rescue fund would be unlikely to include Britain, which continues to use its own currency, the pound. "It would be more of a eurozone thing," he said, referring to the 15 countries that use the common currency, the euro.