Angela Merkel dashes Greek hopes of rescue bid

Angela Merkel, the German chancellor, mounted stiff resistance tonight to any swift bailout of Greece, as a rift opened up between European capitals over how best to tackle the risks posed to the euro.

Despite a show of Franco-German unity on the crisis and the first statement from EU leaders pledging to safeguard the currency's stability, hopes on the markets of a German-led rescue plan to shore up Greece's critical public finances were dashed by Merkel, who repeatedly emphasised that Athens would need to put its own house in order and brushed aside all questions of financial support.

"Germany is stepping totally on the brakes on financial assistance," said a senior EU diplomat. "On legal grounds, on constitutional grounds and on principle." Another senior diplomat said of the Germans: "They're not waving their chequebooks."

An EU summit of 27 government chiefs in Brussels was the first opportunity to tackle the Greek crisis and also send a strong message to the financial markets, which have been betting against the euro for the last week.

Following talks between the Greek prime minister, George Papandreou, Merkel, President Nicolas Sarkozy of France, and Jose Manuel Barroso and Herman Van Rompuy, the European commission and European council presidents, the leaders issued a statement aimed at restoring calm and voicing political support for Papandreou's programme of swingeing budget cuts and structural reforms.

The statement said the 16 EU countries who use the single currency, including Greece, "will take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole." That was seen as a strong political signal to speculators that the big euro economies such as Germany and France would act persuasively to restore confidence in the currency.

But there were no promises of funds for Greece and the statement emphasised that "the Greek government has not requested any financial support".

The European currency and the eurozone's stock markets gave a lukewarm reception to the outcome of the summit. The euro lost 1% against the dollar to $1.360, while the Dow Jones Stoxx 50 Index lost 0.7%. The major French, German, Spanish and Italian indexes fell by between 0.5% and 1.6%.

"This is little more than a sticking plaster at this stage," said Neil Williams, fixed income chief economist at Hermes Asset Management. "What is needed is a credible programme to help all the dominoes, not just one, and this takes time."

Merkel and Sarkozy held a joint press conference after the summit to demonstrate Franco-German unity, but that masked fundamental differences over how to proceed.

"France and Germany cannot agree on anything," said a Brussels official. "They are not always on the same page."

Berlin and Paris have been at odds for the last week through several rounds of negotiations, with the French, backed by the Spanish, seeking a solution through lending to Greece. But Germany and the European Central Bank (ECB) took a hard line, arguing that the bigger risk to the euro's stability came from bailing out a profligate member state which has notched up a budget deficit of almost 13% and a national debt of nearly €300bn.

The split meant 16 finance ministers could not agree a common position before the summit. "Germany cannot justify its taxpayers having to finance the lovely lives of the Greeks," said a senior diplomat.

Rather than bailing out Athens, Berlin is insisting on rigorous policing of the Greek austerity programme by a triple force from the commission, the ECB and the International Monetary Fund, an exercise never attempted in the eurozone.

"We recognise our responsibility for the stability of the eurozone," said ­Merkel. "Greece is not demanding any money from us."

The three will judge, initially in March, whether the Greek programme is being implemented "credibly, realistically and effectively", German officials said.

Merkel said this was the best way to assuage the markets. The parallel is with Ireland which has responded to a similar public finance crisis with savage spending cuts, public sector wage and pension cuts and restored market confidence.

Merkel's tough stance reflects her awareness that voters could react angrily to having to contribute to a bailout at a time of tough budget discipline at home.

Berlin also argues it has scant scope for manoeuvre legally as the German constitutional court would be likely to rule, under the terms of the Maastricht Treaty setting up the single currency, that Germany cannot come to the bilateral aid of a single currency country in trouble.

The European strategy that emerged tonight was one of wait, see and hope. The Greek government does not need to raise any money until the end of March at the earliest.

Jean-Claude Trichet, president of the ECB, complained that the Papandreou medicine was not strong enough, and he was supported by Berlin in demanding tougher action by the Greek government.

Papandreou has pledged to slash the ballooning budget deficit by 4% this year alone. Merkel made clear that this would be taken as the measure of success and that the commission, central bank and IMF experts would need to hold the Greek prime minister to that pledge.

Meetings of eurozone and EU finance ministers next Monday and Tuesday are to deal with the details of the European strategy, but these are more likely to focus on how to police the Greek austerity package than on bailout plans.