G8 summit: Pressure mounts on Angela Merkel over Euro crisis

DAVID Cameron will join François Hollande and other world leaders in rounding on German chancellor Angela Merkel this weekend, piling pressure on her to release funds to ease the debt burden on crippled south European countries.

The Prime Minister and the French president looked set to create an unlikely alliance against Germany as they held bilateral talks at the G8 summit at Camp David, near Washington DC, last night.

Mr Cameron and the French leader publicly disagree on austerity measures, and the Prime Minister snubbed Mr Hollande when he visited London as the Socialist candidate in France’s presidential elections.

But with the markets in turmoil yesterday, seven of the G8 leaders were at one in believing Germany’s strategy to save the eurozone is not working. The FTSE 100 index took the biggest hit, falling 70 points and wiping £80 billion off the value of shares.

As the world leaders arrived in the US, reports emerged from Greece that Mrs Merkel had suggested to the Greek government that a referendum on staying in the eurozone should be held alongside elections next month.

The move was seen by commentators as a gamble by the German chancellor that the Greeks would vote to stay in the euro and then be forced to continue with the programme of austerity measures.

Greece’s government spokesman, Dimitris Tsiodras, said Mrs Merkel aired the proposal during a phone call with Greek president Karolos Papoulias earlier in the day.

He said such a project was “obviously” outside the jurisdiction of the Greek caretaker government appointed this week.

A German government spokeswoman confirmed Mrs Merkel had a “confidential” phone conversation with Mr Papoulias, but declined to confirm or deny the Greek statement on the referendum idea.

As the credit ratings of Spanish banks took another battering and fears of a Greek exit from the euro increased – with new elections expected to produce more votes for parties opposed to the bail-out package – G8 leaders were warned by Mr Cameron that the crisis would become global if it was not dealt with quickly.

There were also fears that ratings agency Moody’s Investor Service – which downgraded 16 Spanish lenders on Thursday night, including the UK arm of Santander – would add more banks to the list over the weekend.

Mr Cameron found an unlikely ally in Mr Hollande with his calls for the European Central Bank (ECB) to become a lender of last resort and guarantor of eurozone government economies and banks exposed to southern European debt.

Ahead of flying out, Mr Cameron said: “It is becoming increasingly clear that they are less likely to be able to sustain that necessary adjustment economically or politically unless the core of the eurozone, including through the ECB, does more to support demand and share the burden of adjustment.”

Mrs Merkel bitterly opposes the move because of Germany’s historic problems with hyper-inflation in the 1930s, which fuelled the rise of the Nazis.

She fears that if the ECB starts to print money, it could lead to similarly destabilising political consequences.

However, Mr Cameron and Mr Hollande are divided over the need to press ahead with austerity and bring in taxes for the rich.

While Mr Cameron has just cut the highest rate from 50p to 45p, Mr Hollande wants to bring in a 75p tax for the super-rich. And the French president is sticking by his belief that austerity does not work, while Mr Cameron insisted that cutting debt is the only way to guarantee future growth – a position he shares with Mrs Merkel.

It is understood Mr Cameron has an ally in Italian prime minister Mario Monti, particularly in a plan to get trade moving while sticking with austerity measures, but also getting the ECB to play a more active role.

But the principal European leaders were due “to have their heads banged together” by US President Obama, according to reports from Washington sources. He will chair the G8 talks and fears that if the contagion spreads beyond the eurozone, it will damage the US economy and hinder his chances of re-election in November.

Mr Cameron expressed confidence he would find “common ground” with the new French president. He said that, while he would do “whatever it takes” to shelter the UK from the fallout of the Greek debt crisis, the coalition’s tough deficit-reduction strategy would stay.

But in an eve-of-summit article for the Politics Home website, he put action to promote growth at the head of a wish-list of results from the gathering, and said he would push for new trade deals to achieve it.

Success at the G8 required “frank discussions on the issues that matter most for our security and prosperity”, including “the resolve to return our own economies to strong and sustainable growth”.

“We must renew our joint efforts to support growth, financial stability and energy security,” he wrote. “And we must work together to give the world economy the one big stimulus that would really make a difference: an expansion of trade freedoms.

“So I will be pushing for progress on the trade deals that the EU is pursuing with three of our G8 partners: Japan, Canada and the US.”