BUSINESS
12/07/2011 05:42 EST | Updated 02/06/2012 05:12 EST

Geithner says he is encouraged at progress Europe is making in addressing debt crisis

BERLIN - German and French officials lowered expectations Wednesday for a deal to save the euro at this week's European summit, deflating investors' hopes for a broad resolution to Europe's debt crisis.

Instead of a new treaty among the 27 members of the European Union, a French official suggested a more likely outcome will be an accord by the 17 nations that use the euro. A German official said reaching a deal might take until Christmas.

The summit, which begins Thursday night, has been described as do-or-die for some eurozone countries, whose economies are being dragged down by crippling debts. Further urgency was added after the ratings agency Standard & Poor's threatened to downgrade European bonds. That would likely make it more expensive for governments to borrow.

German Chancellor Angela Merkel and French President Nicolas Sarkozy released the details Wednesday of a plan for eurozone nations to submit their economies to tighter scrutiny from a central European authority.

That proposal was cheered by markets because investors believe such an agreement would push the European Central Bank to take bolder action to reduce borrowing costs for Italy, Spain and other heavily indebted countries. That would give governments time to strengthen their finances.

After Thursday's comments by the German official, who like the French official spoke on condition of anonymity because the talks are ongoing, the markets turned lower. Germany's main stock index fell 1.1 per cent, while in the U.S. the Dow Jones industrial average dropped 0.6 per cent. The euro shed 0.3 per cent to $1.3358.

"There is a very, very strong expectation that the summit is going to be a success so there is some potential for disappointment," said Stefan Schneider, chief international economist at Deutsche Bank. "But if there is a convincing plan, which