Sarkozy, whose popularity is near a record low as he decides whether to seek a second term next year, has reasons for concern. At the end of March, French financial firms had $672 billion in public and private debt in Greece, Portugal, Ireland, Italy and Spain, according to Basel, Switzerland-based Bank for International Settlements. That’s the biggest exposure to the euro-area’s troubled countries and almost a third more than German lenders. Merkel, who faced down two junior parties in her government that flirted with anti-bailout stances, won a victory last week when her coalition’s lawmakers passed an expansion of the EFSF that allows it to buy sovereign bonds in the secondary market and recapitalize banks. Merkel signaled that Germany’s largesse is now exhausted, saying Oct. 5 that the rescue fund’s new powers must only be used if the “stability of the euro as a whole” is at risk.
Merkel and Sarkozy issued coordinated statements on Sept. 14 after a three-way phone call with Papandreou, saying they are “convinced” Greece will stay in the euro area. In focusing on Greece, Europe’s leaders are “asking the wrong question,” Irish Finance Minister Michael Noonan said yesterday in a speech in Ireland’s upper house of parliament. Europe should recapitalize banks to build a “financial firewall against contagion,” tackle Greek debt and then sort matters of governance, he said. “The question is what should Europe do about the euro zone, and if you answer that question then Greece falls into context,” Noonan said.
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