Austria sanctions spark summit row

Austrian Chancellor Wolfgang Schuessel (centre) wants the sanctions lifted

A personal plea from the Austrian leader for the lifting of sanctions against his country has been rejected by European Union leaders.

The Austrian Chancellor Wolfgang Schuessel told his fellow European heads of government that the sanctions - imposed after the far-right Freedom Party joined a coalition government - should end.

But EU leaders at the summit in Santa Maria da Feira, Portugal, said they would stay in place until at least next January.

The sanctions row has overshadowed the first day of the summit, where leaders have moved closer to a European defence force, and accepted Greece into the single currency - but failed to agree on how to tax cross-border savings.

I want to get rid of the sanctions as soon as possible. They are undermining European identity and credibility

Chancellor Schuessel

Mr Schuessel, in his detailed address to the leaders, said the policy had left Austria semi-isloated, which was creating strong feelings in the wider population.

His People's Party, in coalition with the Freedom Party, was facing problems, he said, and he pleaded for an early end to the measures.

Portugal, which currently holds the EU presidency, ruled that out, but hinted that some technical adjustment of the measures might be possible.

However, no details were given, and it was not clear what the changes might be or when they might come into effect.

Chancellor Schroeder presses for a two-speed Europe

On the tax issue, it was Austria once again which found itself out of step with most other members.

The leaders are trying to reach agreement on how EU citizens with savings in another country should be taxed, ending the tax-free interest they can currently earn.

But any change would mean member states agreeing to exchange banking information - and Austria, with a strong tradition of banking secrecy, is refusing to comply.

With the tax and sanctions issues proving controversial, leaders managed to get through several less contentious areas of policy.

They approved the next stage in creating a European defence force, agreeing how the new force will liaise with Nato, and how the two bodies will make use of the same assets in certain situations.

The UK and Germany are expected to disagree over human rights charter

And they accepted the Greek drachma into the single currency, a move which was hailed as a victory for the reformist government.

The decision came only a year after Greece was rejected because its economy did not measure up to the strict agreed standards.

But since then the government has sharply reduced inflation, the public deficit and debt levels in order to quailfy.

Only three countries - Britain, Denmark and Sweden - will remain outside the currency once Greece has joined.

A controversial charter of human rights also seems likely to divide the summit.

Key issues

Austria sanctions

EU military force

Integration

Human rights charter

Savings tax

The UK wants EU leaders to make clear that the charter will not introduce any new rights and will not be legally binding.

France favours including economic, social and trade union rights in the charter and Germany want it to be enforceable.

Ministers will also discuss the plans for a two-speed Europe, in which a core of EU states could integrate more quickly and fully than others.

Several countries see this strategy as essential for reforms if the union's institutions are to work smoothly when it begins admitting a dozen or so new members in the coming years.

The two-day summit marks the end of the Portuguese presidency before France takes over on 1 July.