EU leaders to gather on May 23 amid growing storm

Germany stands firm on austerity measures and faces growing isolation from European voters baulking at budget cuts with their votes

BERLIN // The European Union announced yesterday it would meet on May 23 to mend a widening rift on how to rescue the euro after Sunday's elections in France and Greece fuelled market fears that the debt crisis is about to erupt again.

The meeting of leaders of the bloc's 27 states could set the stage for a first clash between Angela Merkel, the German chancellor, and France's new socialist president, Francois Hollande, who has demanded a softening of Germany's plan to impose strict austerity.

The informal dinner is to lay the groundwork for another meeting on June 28 and 29, when leaders are to focus on job creation.

Investors continued to sell European shares and the euro yesterday, shaken by the prospect of a Franco-German rift and by political turmoil in Greece, where a leftist party opposed to the international bailout is trying to form a government.

The main stock-market index in Athens fell 4.5 per cent, for a nearly 11 per cent slide in two days. France's main indext, the CAC-40, fell almost 2 per cent.

Germany piled more pressure on Greece and France, with aides to Ms Merkel saying Greece cannot expect to receive any more aid if it refused to reform, and warning Mr Hollande that abandoning austerity was doomed to fail.

"The French economy and the country's finances remain in a precarious position," said Peter Altmaier, the parliamentary whip for Mrs Merkel's conservative Christian Democratic Union (CDU) party.

"Any country that attempts through higher deficits ... to run a supply-driven policy will run afoul of the markets very quickly and see its interest rates rise," he added. "There simply isn't any wiggle room."

Wolfgang Schaeuble, the German finance minister, said Mr Hollande's call to renegotiate the EU's fiscal pact to cut deficits "makes no sense", and that agreements could not be reopened whenever individual member states held elections.

"That is why I think we will convince the new French president," Mr Schaeuble said. "We have clear agreements in Europe."

Mrs Merkel, who openly backed the departing French president Nicolas Sarkozy in the election campaign, said on Monday that the fiscal pact was not negotiable and invited Mr Hollande to Berlin for talks. He is expected to meet her during his first foreign visit as president shortly after his inauguration on May 15.

In Greece, the Radical Left Coalition party, which was lifted into second place on Sunday by voters incensed at the deep cuts imposed in return for international aid, set about trying to form a working government yesterday.

But Alexis Tsipras, the Radical Left leader, was widely expected to fail to find sufficient backing from the range of small parties elected into parliament.

This raised the prospect of a new election in June and more weeks of political limbo.

Mr Tsipras said yesterday that Greece's commitment to austerity was no longer valid. "There is no way we will sneak back in again what the Greek people threw out" in the election, he said.

On Monday, Antonis Samaras, the leader of Greece's largest party, the conservative New Democracy, tried first to form a coalition but admitted defeat within hours after rejections from several party leaders.

Greek voters punished the two main parties that backed the €130-billion (Dh621.46bn) bailout package with the IMF and the EU, and any new Greek government is likely to try to renegotiate the deal - or simply refuse to implement the agreed cutbacks.

In Germany, talk resurfaced of a Greek exit from the euro zone. Gerda Hasselfeldt, the parliamentary floor leader for the Bavarian wing of the CDU, said Greece could only stay in the currency if it delivered the budget cuts attached to the bailout package.

"Aid can only be granted if the conditions are fulfilled. If a country isn't able or willing to meet the conditions, one has to think about if it can remain in the euro zone."

Germany's increasingly strident tone reflects its mounting isolation in Europe. Mr Hollande's election has given leaders of struggling southern European countries a powerful new ally in their drive to halt German-led austerity that has tipped them into recession.

In a telephone call with Mr Hollande on Sunday night, the Italian prime minister Mario Monti promised to cooperate on refocusing European policy towards growth.

Even the IMF, which co-arranged the bailout packages, has shifted its tone. Its managing director, Christine Lagarde, warned in a speech in Zurich on Monday that overly aggressive polices could backfire.

In a sign that the IMF could give leeway to countries that failed to meet their fiscal targets due to an economic slowdown, she said: "If growth is worse than expected, they should stick to announced fiscal measures, rather than announced fiscal targets. In other words, they should not fight any fall in tax revenues or rise in spending caused solely because the economy weakens."