Europe Tries To Calm Fears Over Greek Debt Crisis

French President Nicolas Sarkozy and German Chancellor Angela Merkel announced early Saturday that the 16 eurozone nations will set up a financial defense plan by the time markets open next week to shield their shared currency against further attack.

With Spain and Portugal's fragile financial systems already pounded by markets in the wake of the Greek debt crisis, Sarkozy and Merkel laid out a plan to defend all euro nations against aggressive market movement.

"The euro is an essential element of Europe. We cannot leave it to speculators," Sarkozy said following nine hours of emergency talks by leaders from eurozone nations.

"We will not let others undo what generations have created," said Sarkozy.

Eurozone chief Jean-Claude Juncker underscored the urgency of the threat by saying that even the staunchly independent European Central Bank was on board to help out with the operation after Jean-Claude Trichet huddled with Sarkozy and Merkel just before the summit.

"The ECB will want to contribute" to the mechanism, he said.

"We are talking about a global attack against the euro, and the eurozone must react as one," Juncker said.

Sarkozy said European finance ministers will hold another emergency meeting Sunday to work out specifics of the anti-speculation plan.

The urgency of Sunday's hastily arranged Ecofin meeting is the first clear indication that fears of contagion are coming true, with the crisis that emerged from Greece starting to affect other eurozone countries.

The fighting words from Sarkozy and Juncker were another.

Spain and Portugal are beginning to show the same signs of trouble that Greece was three months ago, with borrowing costs increasing, talk of speculative attacks and increasing concern among European partners that some form of help could be required.

"There's no reason, no fundamental reason in the economy to make such suspicions about our sovereign debt," said Portuguese Prime Minister Jose Socrates.

The summit, originally called to sign off on a bailout plan for Greece and draw lessons for the future, turned into one of crisis management amid market turmoil.

Financial markets have continued to sell off the euro and Greek bonds even as EU leaders have insisted for days that the Greek financial implosion is a unique combination of bad management, free spending and statistical cheating that doesn't apply to other euro-zone nations.

Beyond immediate measures to protect the euro, several leaders at the meeting said they want to impose punishing budgetary rules which would force member nations walk a tight budgetary line and avoid the kind of cheating and overspending that led to Greece's problems.

Several leaders, including Sarkozy and Merkel, insisted the near-collapse of Greece and subsequent market moves against other eurozone nations underscored that the framework of rules for managing the euro needed revamping, according to officials close to the talks.

To deal with the crisis, some also wanted a deeper involvement of the European Central Bank.

"We must sharpen the edge" of the rules to keep wayward governments in line, Merkel said, adding the 16 eurozone leaders should also consider changes to the 1992 treaty that laid the groundwork for the shared currency. "Otherwise, it won't work, in my opinion."

Opening the evening summit among visibly tense dinner partners, Sarkozy and European Commission President Jose Manuel Barroso insisted the crisis now had gone beyond Greece itself and affected the very roots of the currency.

Canadian Finance Minister Jim Flaherty chaired a G-7 telephone conference of finance minister and central bankers on the Greek debt situation and he urged European countries to move quickly with a strong response.

"The sooner the better," said Flaherty, who declined to talk about the details of the talks. "The key is that we move toward a resolution. This has to be resolved. It cannot go on indefinitely."

Flaherty said discussions are continuing and he expects there will be further discussion this weekend.

"Every one understands the need for a clear, timely and strong response," Flaherty said.

The euro has rules to stop governments from undermining it with reckless spending, limiting deficits to 3 percent of gross domestic product. Those rules were shown to lack teeth when even big countries such as Germany and France broke them for years without serious consequences.

Merkel, whose country holds the key to any solution, spoke Friday with President Barack Obama, who said he supported the effort to deal with the financial crisis in Europe.

They said the bailout should keep the problem from spreading to other countries by giving Greece three years of support and preventing a default when it has to pay euro8.5 billion in bonds coming due May 19. All leaders confirmed the support for Greece, and Sarkozy said the money would arrive on time.

"We are determined to move forward. But there is unprecedented volatility throughout the world, in the world economy," said Greek Prime Minister George Papandreou.

So far, the markets have taken little heed of leader's reassurances. Stocks, Greek bonds and the euro plunged even after the head of the European Central Bank, Jean-Claude Trichet, tersely underlined that "Portugal is not Greece. Spain is not Greece" on Thursday. The euro fell to $1.2520, its lowest in 14 months, but recovered to $1.2721 later.

Along with the eurozone meeting, the G-7 finance ministers were holding a teleconference Friday on the crisis.

After struggling to get ahead of the crisis for weeks, European governments are now underlining their determination to act by speeding approval of their contributions to the a euro110 billion ($140 billion) emergency loan package for Athens.

The consequences of failure could be dire.

Many economists think Greece will eventually default anyway, which could deal a sharp blow to the euro and lead to sharply higher borrowing costs for other indebted countries in Europe.

Default, or market contagion to other countries could lead to panic, intimidating consumers from spending and making banks fearful to lend money to businesses and consumers.

In Germany, where bailing Greece out is unpopular, both houses of parliament approved the package Friday and sent it to President Horst Koehler for his signature. With Italy and France, that accounts for over two-thirds of the European part of the bailout package. The International Monetary Funds adds euro30 billion on its own.

Greek lawmakers approved drastic austerity cuts Thursday worth about euro30 billion ($38.18 billion) through 2012 — that will slash pensions and civil servants' pay and further hike consumer taxes. The measures were a prerequisite needed to secure international rescue loans.

European stocks fell but recovered most of their losses by early afternoon Friday. But in early action in New York, traders looked past a surprisingly strong report on the U.S. jobs market and focused instead on Europe's spreading debt crisis. The Dow fell 139.89 points, or 1.33 percent, to 10,380.43.