Sarkozy meets Merkel as Greek finance minister axed

French President Nicolas Sarkozy meets German Chancellor Angela Merkel in Berlin on Friday to debate their differences over Greece’s rescue package, as Greek Prime Minister George Papandreou names a new finance minister.

Reuters/Fabrizio Bensch

Sarkozy on Thursday called on European Union members to show “a spirit of responsibility” in face of the new Greek crisis.

Belgian Finance Minister Didier Reynders on Friday warned that failure to bail out Athens could lead to a bank collapse like that of the US’s Lehmann Brothers in 2008, leading to “a collapse in confidence right through the financial sector”.

But France and Germany have been at loggerheads, with Merkel wanting banks to take losses worth about a third of the rescue package, which is expected to total 125 billion euros.

French banks are highly exposed to Greek debt to the tune of 56.75 billoon euros and Moody’s credit ratings agency threatened three with downgrading on Wednesday.

"I am sure that a compromise is possible today," German foreign ministry official Werner Hoyer said ahead of the meeting.

At a press conference on Friday Merkel declared that private-sector contributions should be "voluntary" and, unusually, called on Greece's New Democracy opposition party to support the government's austerity package;

Papandreou on Friday demoted finance minister George Papaconstantinou, who has come under fire for the failure of the previous bailout package to revive the economy, leading to a sharp rise in unemployment.

The prime minister appointed his one-time rival for leadership of the ruling the Socialist Party (Pasok), Evangelos Venizelos, moving him from defence. Venizelos, 54, is a French-educated constitutional expert who headed Greece's preparations for the Athens 2004 Olympics.

Other government changes included:

Foreign Ministry - Stavros Lambrinidis, former head of Pasok’s group in the European Parliament, replaces Dimitris Droutsas;
Defence ministry – deputy minister Panos Beglitis promoted to full minister;
Labour ministry – deputy minister George Koutroumanis, promoted to full minister;
Health ministry - Andreas Loverdos given extra responsibilities;
Environment ministry - Tina Birbili replaced by Droutsas.

The reshuffle came after a failure to bring the right-wing opposition into a coalition government and a crisis in Pasok.

A vote of confidence in the new government is expected to take place as early as Sunday, as eurozone ministers start a two-day meeting in Luxembourg to discuss the Greek crisis.

Amid fears that the single European currency might not survive, the euro fell to a record low as the crisis continued, hitting 1.4209 in New York late Thursday but holding firm on Friday.

Strikes, protests and the failure to agree a coalition have shaken markets’ belief that the Greek government can carry out its new austerity package, which entails spending cuts and tax rises aimed at raising 28 billion euros and privatisations worth 50 billion euros.