By Luke Baker
BRUSSELS (Reuters) - German and French accusations that the United States has run spying operations in their countries, including possibly bugging Chancellor Angela Merkel's mobile phone, are likely to dominate a meeting of EU leaders starting on Thursday.
The two-day Brussels summit, called to tackle a range of social and economic issues, will now be overshadowed by debate on how to respond to the alleged espionage by Washington against two of its closest European Union allies.
Representatives of both Merkel and French President Francois Hollande said the two would hold a one-on-one meeting ahead of the 1500 GMT start of the summit to discuss the espionage issue.
For Germany the matter is particularly sensitive. Not only does the government say it has evidence the chancellor's personal phone was monitored, but the very idea of bugging dredges up memories of eavesdropping by the Stasi secret police in the former East Germany, where Merkel grew up.
Following leaks by data analyst Edward Snowden, which revealed the reach of the U.S. National Security Agency's vast data-monitoring programmes, Washington finds itself at odds with a host of important allies, from Brazil to Saudi Arabia.
In an unusually strongly worded statement on Wednesday evening, Merkel's spokesman said the chancellor had spoken to President Barack Obama to seek clarity on the spying charges.
"She made clear that she views such practices, if proven true, as completely unacceptable and condemns them unequivocally," the statement read.
White House spokesman Jay Carney said Obama had assured Merkel that the United States "is not monitoring and will not monitor" the chancellor's communications, leaving open the possibility that it had happened in the past.
A White House official declined to say whether Merkel's phone had previously been bugged. "I'm not in a position to comment publicly on every specific alleged intelligence activity," the official said.
German Foreign Minister Guido Westerwelle has summoned the U.S. ambassador to Berlin to discuss the issue.
Germany's frustration follows outrage in France since Le Monde newspaper reported the NSA had collected tens of thousands of French phone records between December 2012 and January 2013.
President Francois Hollande has made clear he plans to put the spying issue on the summit agenda, although it is not clear what that will ultimately achieve.
While Berlin and Paris are likely to find sympathy among many of the EU's 28 member states, domestic security issues are not a competence of the European Union. The best that may be hoped for is an expression of support from leaders and calls for a full explanation from the United States.
"Between friends, there must be trust. It has been shaken. We expect answers from Americans quickly," European commissioner for financial regulation Michel Barnier, a Frenchman, said in a message on Twitter.
DATA PRIVACY RULES
The furore over the alleged espionage could encourage member states to back tougher data privacy rules currently being drafted by the European Union. The European Parliament this week approved an amended package of legislation that would overhaul EU data protection rules that date from 1995.
The new rules would restrict how data collected in Europe by firms such as Google and Facebook is shared with non-EU countries, introduce the right of EU citizens to request that their digital traces be erased, and impose fines of 100 million euros or more on rule breakers.
The United States is concerned that the regulations, if they enter into law, will raise the cost of doing business and handling data in Europe. Google, Yahoo!, Microsoft and others have lobbied hard against the proposals.
Given the spying accusations, France and Germany - the two most influential countries in EU policy - may succeed in getting member states to push ahead on negotiations with the parliament to complete the data regulations and make them tougher.
That could mean an agreement is reached early next year, with the laws possibly coming into force in 2015. For the United States, this could substantially change how data privacy rules are implemented globally.
It may also complicate relations between the United States and the EU over an agreement to share a large amount of data collected via Swift, the international system used for transferring money electronically, which is based in Europe.
Among the revelations from Snowden's leaks is that the United States may have violated the Swift agreement, accessing more data than it was allowed to.
The European Parliament voted on Wednesday to suspended Swift and the spying accusations may make EU member states support a firm line, complicating the United States' ability to collect data it says is critical in combating terrorism.
Despite the outrage in Paris and Berlin, the former head of France's secret services said the issue was being blown out of proportion and no one should be surprised by U.S. spying.
"I'm bewildered by such worrying naivite. You'd think the politicians don't read the reports they're sent - there shouldn't be any surprise," Bernard Squarcini told Le Figaro.
"The agencies know perfectly well that every country, even when they cooperate on anti-terrorism, spies on its allies. The Americans spy on us on the commercial and industrial level like we spy on them, because it's in the national interest to defend our businesses. No one is fooled." (Writing by Luke Baker; additional reporting by Madeline Chambers and Noah Barkin in Berlin, Julien Ponthus and Andreas Rinke in Brussels, and Alexandria Sage in Paris; editing by David Stamp)