European leaders clashed over joint debt sales as they called onGreece to stick with the budget cuts needed to stay in the euro andoffered no immediate relief for recession-wracked Spain.

The 18th summit in more than two years of crisis fighting wasmarked by new French President Francois Hollande's challenge to theGerman-dominated deficit-cutting orthodoxy that has failed tostabilize the euro area and led to speculation that Greece might beforced out.

“We had a not unheated discussion on euro bonds,” LuxembourgPrime Minister Jean-Claude Juncker told reporters in Brussels earlytoday after six hours of talks. Joint borrowing “didn't find muchsupport, particularly in the German speaking area, but found acertain enthusiasm in the French speaking area.”

The euro declined against the dollar amid concern that divisionsbetween France and Germany will frustrate the search for answers.The common currency traded at $1.2572 as of 7:48 a.m. in Brussels,down 0.1 percent on the day, after yesterday touching $1.2545, thelowest since July 13, 2010. Futures on the Standard & Poor's500 fell 0.3 percent. Yields on German five-, 10- and 30-year bondsdropped to record lows as investors sought a haven.

Leaders gave European Union President Herman Van Rompuy the jobof sketching out “building blocks” for a more integrated euro areaby the next summit on June 28-29 — after a Greek election that maytrigger the country's withdrawal from the currency.

The 2012 institutional rethink comes after the setup of tworescue funds, a “Euro Plus Pact” to promote competitiveness, a“European semester” to coordinate economic policies, unprecedentedEuropean Central Bank bond purchases, two overhauls of fiscal rulesand the drafting of a German-inspired deficit-limitationtreaty.

Van Rompuy's examination will extend to a possible cross-borderdeposit insurance scheme to underpin a banking system pockmarked bybad debt, notably on Europe's crisis-hit periphery.

Proposals for a centralized “bank resolution” fund made littleheadway in the aftermath of the Lehman Brothers Holdings Inc.crisis of 2008, as each European country guarded its banks andrefused to subsidize failing institutions elsewhere.

German Difficulties

“These ideas of stricter banking supervision and resolution wereonly mentioned, we hadn't a real discussion,” Van Rompuy said ofthe leaders' debate.

Euro bonds served as a lightning rod, with AAA rated countriessuch as Germany and Finland saying that joint borrowing would forceup their own interest rates and give deficit-prone states anincentive to go on spending.

Germany has “huge difficulties” with euro bonds, ChancellorAngela Merkel said. On his ninth day in office and at his firstEuropean summit, Hollande backed the idea in a demonstration thatthe leaders of Germany and France are no longer on the same page inmanaging the crisis.

“Some countries are totally hostile, some can imagine them inthe future, some can imagine doing them much more quickly,”Hollande said. “I was not alone.”

The leaders dedicated a separate statement to Greece, set for anew election on June 17 after voters on May 6 catapulted ananti-bailout party into second place and denied a majority to thetwo parties that have dominated the country since the 1970s.

Next month's revote looms as a referendum on whether Greecestays in the euro, since an Athens government that goes back onausterity would be cut off from the next installments of the 240billion euros ($302 billion) in aid pledged since 2010.

“We want Greece to remain in the euro area while respecting itscommitments,” the leaders said in the statement. “We expect thatafter the elections, the new Greek government will make thatchoice.”

Greece came up at the end of the summit that focused ongrowth-boosting measures, and an official said there was nodiscussion of Spain, the euro zone's fourth-largest economy.

Spanish Prime Minister Mariano Rajoy is fighting the triplethreat of recession, higher-than-targeted deficits and a bankingsystem hobbled by about 184 billion euros of what the Bank of Spaincalls “problematic” assets that plummeted when the real-estatebubble burst.

The Spanish government, making the fourth attempt in three yearsto shore up banks, has so far ruled out tapping rescue funds sincethat would tie Spain to the same sort of conditions as Greece,Ireland and Portugal, the three countries in formal aidprograms.

Rajoy's Plea

Rajoy pleaded with the central bank to restart a bond-purchaseprogram that it mothballed in the face of German-led opposition. Sofar, the ECB has stockpiled 212 billion euros of government bondsto cap interest rates in hard-hit countries.

“I insist it is up to the ECB to take this decision that it hasalready taken in the past,” Rajoy said. “This question has a hugeimportance at the moment, much more than the future design of theEuropean Union.”

Spanish 10-year bond yields rose 12 basis points to 6.20 percentyesterday. Spain pays 482 basis points more than Germany to borrow,an extra cost that Rajoy said will nullify the savings derived fromspending cuts. The risk premium reached a euro-era record of 490basis points on May 17.

Asked whether the Spanish leader made that appeal during themeeting, ECB President Mario Draghi said: “No he didn't. Thisliquidity could be provided by other sources as well.”

Bloomberg News

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