France and Germany wrangled over how to tackle Europe's debtcrisis a day before a finance ministers' meeting in Brusselsintended to set a common strategy on dealing with the turmoil.

With a summit of European leaders scheduled for two days later,a disagreement over the European Central Bank's role in the rescueplan threatens to stymie progress on the banking and economicquestions needed to deliver the comprehensive strategy demanded byglobal policy makers. Luxembourg Prime Minister Jean-ClaudeJuncker, who chairs the group of euro-area finance ministers,indicated an impromptu meeting of European leaders in Frankfurtlast night failed to resolve differences. “We are still meeting,”he said as he departed.

French President Nicolas Sarkozy, whose wife was reportedlygiving birth to his first daughter, jetted into Frankfurt to meetwith officials as they attended an event to honor outgoing ECBPresident Jean-Claude Trichet. Sarkozy, German Chancellor AngelaMerkel and International Monetary Fund Managing Director ChristineLagarde left the event at the Frankfurt Opera House withoutcommenting.

“Even with the current problems in the negotiations, we expectthat there will be at the end a compromise,” economists includingJuergen Michels at Citigroup Inc. in London said in an e-mailednote. “However, with the participants having still very divergentviews, the outcome probably will not be a credible, comprehensivepackage.”

Euro Weakens

Stocks fell and Spanish and French bond yields rose on the splitover Europe's rescue strategy. The Stoxx Europe 600 Index fell 0.6percent as of 12:14 p.m. in Paris, while the CAC 40 dropped 1percent. The Spanish two-year note yield jumped six basis points,while the extra yield investors demand to hold French 10-year bondsinstead of benchmark German bunds rose to a euro-era record.

French Prime Minister Francois Fillon stepped up calls for the440 billion-euro ($608 billion) European Financial StabilityFacility to be turned into a bank and given leverage by the ECBwhich, along with Germany, has rejected using its balance sheet tobolster the fund. Germany has endorsed enabling the EFSF to insurea portion of cash-strapped nations' bond sales.

The EFSF “needs to be massive,” Fillon said in Paris.“The 440billion euros need to be used with a leverage effect, a bit like abank.”

French Finance Minister Francois Baroin also said the EFSFshould be turned into a bank, though he noted the “reticence” ofthe ECB and the “German position.”

“For us it is and will remain the most effective position. TheAmericans do it, the British do it,” he said.

Primary-Market Purchases

Trichet has been a key part of Europe's crisis-fighting effort,reluctantly pushing the ECB to buy bonds in the secondary market, arole it may be forced to keep under a revamped strategy.

Primary-market purchases by the enhanced EFSF generally shouldbe limited to no more than 50 percent of the final issued amount,according to draft guidelines for the backstop from the EuropeanCommission, the European Central Bank and senior officials from the17 euro-region nations, obtained by Bloomberg News. The EFSF shouldparticipate at the weighted average price of the auction, itsaid.

“That means that EFSF's share is no larger than the share boughtby the market,” the draft says. “It gives an incentive to theissuer to accept market bids, because for each million of acceptedmarket bids the member state will receive an additional millionfrom EFSF.”

'Disconcerting' Pace

Canadian Finance Minister Jim Flaherty said that Europeanleaders' slow pace toward a solution is “disconcerting,” whileadding they have the “sense of urgency required.” The rescue fundisn't sufficient to deal with the crisis and will need to beleveraged, he told reporters in Ottawa yesterday.

The disagreements among policy makers came as banks lobbiedagainst forced recapitalization and deeper writedowns on Greekdebt.

While Merkel this week sought to lower expectations that thecrisis-fighting effort would climax at the Sunday summit inBrussels, Group of 20 finance chiefs last week set the meeting as adeadline. Failure risks a global economic slump, they said.

“Many expect to be underwhelmed at the weekend,” David Mackie,chief European economist at JPMorgan Chase & Co., said in aninterview. “If they haven't settled the leverage issue, then thesense of being underwhelmed will be overwhelming.”

Protests

Policy makers are struggling to end a crisis that began inGreece two years ago this week. In Athens yesterday, protestersclashed with police outside Parliament before Prime Minister GeorgePapandreou won a preliminary vote on a new austerity package. Thefinal vote is scheduled for today.

The issues frustrating European authorities include how to writedown of as much as 50 percent on Greek bonds, setting up a backstopfor banks and finding a continued central bank role.

The world economy is facing the “threat of profound andtraumatic disruption,” Norman Chan, chief executive of the HongKong Monetary Authority, said in a speech published on the de factocentral bank's website.

Also attending the event in Frankfurt last night were MarioDraghi, who replaces the retiring Trichet on Nov. 1, European UnionPresident Herman van Rompuy and European Commission President JoseBarroso. Baroin and German finance minister Wolfgang Schaeuble werethere as well. No statement was issued.

Van Rompuy praised Trichet for taking “unconventional” steps andnot being beholden to dogma, while Barroso told reporters inBrussels that he was optimistic that an accord will be reached.

“Independence doesn't mean detachment from politicaldecision-making,” Van Rompuy said at the Trichet farewell ceremony.“Monetary policy cannot be conducted in a social and politicalvoid. The central bank's independence is a right, but also entailsduties.”

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