They also made clear that saving the euro was ultimately more important to them than rescuing Greece.

After emergency talks with Greek Prime Minister George Papandreou, German Chancellor Angela Merkel said: “We would rather achieve a stabilization of the euro with Greece than without Greece, but this goal of stabilizing the euro is more important.”

Sarkozy hammered home the same message, telling a joint news conference with Merkel: “Our Greek friends must decide whether they want to continue the journey with us.”

Papandreou outraged European partners and caused panic on financial markets by announcing on Monday that Greece would hold a referendum on a second bailout plan negotiated with euro zone leaders last week.

The Greek leader, looking chastened after a torrid dinner with European Union decision-makers that Merkel called “tough and hard” on the eve of a summit of G20 major world economies, said the plebiscite would take place around December 4.

“It’s not the moment to give you the exact wording, but the essence is that this is not a question only of a program, this is a question of whether we want to remain in the eurozone,” Papandreou said.

Despite opinion polls showing a majority of Greeks, weary of two years of deepening austerity, think the bailout package was a bad deal for Greece, he said he expected more support from the wider population than he could muster in parliament.

“I believe the Greek people are wise and capable of making the right decision for the benefit of our country,” he said.

Sarkozy and Merkel said euro zone finance ministers would meet next Monday to speed up decisions on leveraging the euro zone’s rescue fund to build a firewall to protect other weaker members of the 17-nation currency area.

The EU and IMF said Greece would not receive an urgently needed 8 billion euro ($11 billion) aid installment, due this month, until after the vote because official creditors wanted to be sure Athens would stick to its austerity program.

European Commission President Jose Manuel Barroso delivered this message to Papandreou before his arrival in Cannes, EU sources said.

This was after the Greek leader sent a letter to EU leaders saying he wanted to negotiate the details of the second package before the referendum, they said. The letter angered European officials, raising the level of mistrust toward Greece.

Papandreou said Greece had enough money to keep running until mid-December, when it has to redeem more than 6 billion euros in debt.

WEEKS OF UNCERTAINTY

Sarkozy’s office said several euro zone leaders attending the G20, including the Spanish and Italian prime ministers, would meet on Thursday morning in Cannes to review the crisis.

In fresh signs of the market turmoil unleashed by the Greek move, the euro zone’s EFSF rescue fund, which lends money to troubled member states, was forced to put on hold plans to raise 3 billion euros in the bond market.

And Italy’s financial stability panel said some Italian banks were having difficulty raising money on international markets.

Asian G20 members piled pressure on Europe to tackle the crisis before it wreaks serious harm on the world economy.

China’s deputy finance minister, Zhu Guangyao, said he hoped the uncertainty over the Greek referendum could be contained, adding that Beijing could not consider investing more in the euro zone’s bailout fund given the lack of detail on proposals to leverage it.

South Korean President Lee Myung-bak said the G20 must act swiftly and boldly to contain the crisis, which was spilling over to the rest of the world.

If Papandreou loses the referendum, Greece faces a disorderly default which would hammer Europe’s banks and threaten the much larger economies of Italy and Spain, which the bloc may not have the means to bail out.

The chairman of euro zone finance ministers, Jean-Claude Juncker, said Greece could go bankrupt if voters rejected the bailout package and Japanese Finance Minister Jun Azumi said: “Everyone is bewildered.”

Juncker, Barroso, European Council President Herman Van Rompuy, IMF chief Christine Lagarde and a senior European Central Bank official attended Wednesday’s talks in the southern French resort town.

ECB IN SPOTLIGHT

Doubt about Europe’s ability to contain the debt crisis has once more sent markets into a spin and put Italy firmly in the firing line.

The risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high on Tuesday, despite European Central Bank buying of its bonds.

Italian Prime Minister Silvio Berlusconi scrambled to come up with measures to placate markets, holding an emergency cabinet meeting to accelerate budget reforms amid mounting calls for his resignation.

Ireland’s finance minister said the ECB would be forced to pledge “a wall of money” to buy bonds, something many of its policymakers are deeply uncomfortable about.

Until the Greek situation is clearer, last week’s package of measures is likely to be in limbo, leaving the ECB as the only bulwark against market attacks.

The head of Germany’s banking association, Michael Kemmer, said agreement on a 50 percent writedown of Greek debt by its private creditors would have to wait. “I can’t imagine a debt exchange taking place before the referendum,” he said.

The Greek press, including dailies traditionally friendly to the government, almost unanimously condemned Papandreou.

Center-left newspaper Eleftherotypia described the prime minister on its front page as “The Lord of Chaos”. Ethnos, another pro-government paper, called the referendum “suicidal”.

(additional reporting by Dina Kyriakidou in Athens, Gernot Heller, Lesley Wroughton, Luke Baker and Gui Qing Koh in Cannes, and James Mackenzie in Rome; writing by Paul Taylor; editing by Noah Barkin)

They also made clear that saving the euro was ultimately more important to them than rescuing Greece.

After emergency talks with Greek Prime Minister George Papandreou, German Chancellor Angela Merkel said: “We would rather achieve a stabilisation of the euro with Greece than without Greece, but this goal of stabilising the euro is more important.”

Sarkozy hammered home the same message, telling a joint news conference with Merkel: “Our Greek friends must decide whether they want to continue the journey with us.”

Papandreou outraged European partners and caused panic on financial markets by announcing on Monday that Greece would hold a referendum on a second bailout plan negotiated with euro zone leaders last week.

The Greek leader, looking chastened after a torrid dinner with European Union decision-makers that Merkel called “tough and hard” on the eve of a summit of G20 major world economies, said the plebiscite would take place around Dec. 4.

“It’s not the moment to give you the exact wording, but the essence is that this is not a question only of a programme, this is a question of whether we want to remain in the eurozone,” Papandreou said.

Despite opinion polls showing a majority of Greeks, weary of two years of deepening austerity, think the bailout package was a bad deal for Greece, he said he expected more support from the wider population than he could muster in parliament.

“I believe the Greek people are wise and capable of making the right decision for the benefit of our country,” he said.

Sarkozy and Merkel said euro zone finance ministers would meet next Monday to speed up decisions on leveraging the euro zone’s rescue fund to build a firewall to protect other weaker members of the 17-nation currency area.

The EU and IMF said Greece would not receive an urgently needed 8 billion euro aid instalment, due this month, until after the vote because official creditors wanted to be sure Athens would stick to its austerity programme.

European Commission President Jose Manuel Barroso delivered this message to Papandreou before his arrival in Cannes, EU sources said.

This was after the Greek leader sent a letter to EU leaders saying he wanted to negotiate the details of the second package before the referendum, they said. The letter angered European officials, raising the level of mistrust towards Greece.

Papandreou said Greece had enough money to keep running until mid-December, when it has to redeem more than 6 billion euros in debt.

WEEKS OF UNCERTAINTY

Sarkozy’s office said several euro zone leaders attending the G20, including the Spanish and Italian prime ministers, would meet on Thursday morning in Cannes to review the crisis.

In fresh signs of the market turmoil unleashed by the Greek move, the euro zone’s EFSF rescue fund, which lends money to troubled member states, was forced to put on hold plans to raise 3 billion euros in the bond market.

And Italy’s financial stability panel said some Italian banks were having difficulty raising money on international markets.

Asian G20 members piled pressure on Europe to tackle the crisis before it wreaks serious harm on the world economy.

China’s deputy finance minister, Zhu Guangyao, said he hoped the uncertainty over the Greek referendum could be contained, adding that Beijing could not consider investing more in the euro zone’s bailout fund given the lack of detail on proposals to leverage it.

South Korean President Lee Myung-bak said the G20 must act swiftly and boldly to contain the crisis, which was spilling over to the rest of the world.

If Papandreou loses the referendum, Greece faces a disorderly default which would hammer Europe’s banks and threaten the much larger economies of Italy and Spain, which the bloc may not have the means to bail out.

The chairman of euro zone finance ministers, Jean-Claude Juncker, said Greece could go bankrupt if voters rejected the bailout package and Japanese Finance Minister Jun Azumi said: “Everyone is bewildered.”

Juncker, Barroso, European Council President Herman Van Rompuy, IMF chief Christine Lagarde and a senior European Central Bank official attended Wednesday’s talks in the southern French resort town.

ECB IN SPOTLIGHT

Doubt about Europe’s ability to contain the debt crisis has once more sent markets into a spin and put Italy firmly in the firing line.

The risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high on Tuesday, despite European Central Bank buying of its bonds.

Italian Prime Minister Silvio Berlusconi scrambled to come up with measures to placate markets, holding an emergency cabinet meeting to accelerate budget reforms amid mounting calls for his resignation.

Ireland’s finance minister said the ECB would be forced to pledge “a wall of money” to buy bonds, something many of its policymakers are deeply uncomfortable about.

Until the Greek situation is clearer, last week’s package of measures is likely to be in limbo, leaving the ECB as the only bulwark against market attacks.

The head of Germany’s banking association, Michael Kemmer, said agreement on a 50 percent writedown of Greek debt by its private creditors would have to wait. “I can’t imagine a debt exchange taking place before the referendum,” he said.

The Greek press, including dailies traditionally friendly to the government, almost unanimously condemned Papandreou.

Centre-left newspaper Eleftherotypia described the prime minister on its front page as “The Lord of Chaos”. Ethnos, another pro-government paper, called the referendum “suicidal”.

(Additional reporting by Dina Kyriakidou in Athens, Gernot Heller, Lesley Wroughton, Luke Baker and Gui Qing Koh in Cannes, and James Mackenzie in Rome; writing by Paul Taylor; editing by Noah Barkin)

Jabbing his finger, he berated leaders from Africa, Asia, Europe and the United States to own up to their responsibilities and make compromises. Point by point he delivered his challenges, each starting with: ‘Who would dare..’ (implied answer, no one)

Who in the developed world would deny his historic responsibility for global warming (a reference to the United States?), who in Africa would venture to tear up a deal that seeks to benefit African states (a reference to those who want more financing), who would have the nerve to reject the notion that emissions cuts must be transparent (a reference to China?).

He finished by telling leaders to sit down and negotiate hard over the next 24 hours. “We need to change track or we are heading for disaster,” he said, then strode from the stage.

Some of Sarkozy’s energy is finally permeating these talks. Leaders and ministers are talking hard, most likely they will continue to talk late in to the night in the hope there will be something to sign on Friday.

But some inside and outside Russia argue it would be unwise for Europe and the United States to reject the proposal out of hand, not least because, as one Russian official put it, this is one of the few occasions where Russia isn’t disagreeing but coming up with something constructive.

Yes Moscow’s draft treaty has gaps, they concede, yes it is almost entirely focused on security in the military sense and yes it doesn’t give much weight to liberal democracy and human rights as envisioned in modern perceptions of security – but it is a starting point for discussion.

Shutting Russia out plays in to the hands of those in Moscow, Washington and other capitals who prefer the simplicity of the Cold War’s zero sum game. It does no favours to modernisers in Russia who want to build cordial international relations, promote democratic society and build Russia’s economy away from its over-reliance on natural resources.

Russia needs stability outside its borders in order to modernise at home.

Twenty years after the collapse of communism, Russia and the rest of Europe are still struggling to establish a relationship of mutual trust and respect. They are bound by commerce – Europe is the prime market for Russian energy exports – but even that relationship is rarely straightforward. The annual Russia-Ukraine-EU gas drama is just one example of how fraught the relationship can be.

On a political and diplomatic level the complications are even greater.
One need look no further than the 2008 war in Georgia when preconceptions and stereotypes dictated responses on all sides. Western media and many politicians condemned Russia outright. It was only with the publication of an EU commissioned report into the war this year that a fuller story was told. NATO’s steady expansion towards Russia’s borders has angered Moscow, where it has been noted that the Baltic states and central Europe became far more openly hostile to Russia once they had NATO and EU membership in the bag.

The decision of the United States and EU members to recognise Kosovo still rankles in Moscow, where the move was seen as a dangerous precedent. In the words of one Russian official: “We need to listen to each other. Sometimes Russia is not wrong.”

Russian officials will concede that Russia too needs to change.
In many ways President Medvedev’s proposals highlight the gap between Russian and European perceptions of what constitutes peace and security. For Medvedev it is about military hardware and borders. For the West security is as much about human rights and democracy.

Western countries object to Medvedev’s plan for four main reasons – they suspect it as an attempt to give Russia a veto over security in Europe and make NATO irrelevant, they see it as a way of codifying a Russian sphere of influence, they see it as an attempt to inflate the importance of the CSO and they see it as a way of sidelining the parts of the OSCE the Kremlin dislikes.

So Medvedev’s proposed treaty isn’t going to fly.

But it can be a starting point for discussion.

Preferable to a whole new treaty is a problem solving agenda, says Oksana Antonenko, senior fellow for Russia and Eurasia at the International Institute for Strategic Studies. Speaking at a debate organised by the Valdai club and IISS, she argued for ‘a problem solving agenda’ focused on central Asia, the Black Sea, protracted or frozen conflicts and Russia-NATO cooperation.

In a paper prepared for the same event, Sergei Karaganov, deputy director of the Institute of Europe at the Russian Academy of Sciences, and Timofei Bordachev, director of the Center for Comprehensive European and International Studies at the State University, argued that Russia and the rest of Europe need one another more than they realise, especially in the face of growing Asian economic power:

“If (they) fail to unite on the basis of their cultural proximity and the complementarity of their economies, they will be doomed to play the role of secondary or even tertiary players in the world of the future. Europe will then become a Venice, a rich but decaying continent and a monument to its former greatness, while Russia will play the role of an agrarian and raw material appendage of China and other developed economies.”