France, Germany and Italy agreed yesterday (24 November) not to seek the European Central Bank intervention to rescue the eurozone from a deepening sovereign debt crisis.
“The three of us want to indicate our support to the ECB and its leaders,” French President Nicolas Sarkozy said after talks with Italian Prime Minister Mario Monti and German Chancellor Angela Merkel.
“The three of us have indicated that we will respect the independence of this essential institution and we agreed that we should refrain making any demand, positive or negative, on it. That is a position that we have elaborated together,” he said
The leaders underlined that they trusted the independent central bank and would not touch its inflation-fighting mandate when they propose changes of the European Union's treaty to achieve closer fiscal union.
French ministers have called for the central bank to intervene massively to counter a market stampede out of eurozone government bonds, while Merkel and her ministers have said the EU treaty bars it from acting as a lender of last resort.
Sarkozy said Paris and Berlin would circulate joint proposals before a 9 December EU summit for treaty amendments to entrench tougher budget discipline in the 17-nation euro area.
Merkel said the proposals for more intrusive powers to enforce EU budget rules, including the right to take delinquent governments to the European Court of Justice, were a first step towards deeper fiscal union.
But she said they would not modify the statute and mission of the central bank, nor soften her opposition to issuing joint eurozone bonds, except perhaps at the end of a long process of fiscal integration.
Some French and EU officials hoped Berlin would soften its resistance to a bigger crisis-fighting role for the ECB after Germany itself suffered a failed bond auction on Wednesday, showing how investors are wary even of Europe's safest haven.
"There is urgency" for ECB intervention, Foreign Minister Alain Juppe told France Inter radio before the meeting.
Sarkozy took a step towards Merkel this week by agreeing to amend the treaty to insert powers to override national budgets in euro area states that go off the rails. But there was no sign of a German concession on euro zone bonds or the ECB's role.
"This is not about give and take," Merkel said. Only when European countries reformed their economies and cut their deficits would borrowing costs converge. "To try to achieve this by compulsion would weaken us all."
With contagion spreading fast, a majority of 20 leading economists polled by Reuters predicted that the eurozone was unlikely to survive the crisis in its current form, with some envisaging a "core" group that would exclude Greece.
Analysts believe that sense of crisis will in the end force dramatic action. "I think we are moving closer to a policy response probably, which could be either more aggressive ECB action or the idea of euro bonds could gain some traction," said Rainer Guntermann, strategist at Commerzbank.
Resistance to austerity
In signs of public resistance to austerity in two southern states under EU/IMF bailout programmes, riot police clashed with workers at Greece's biggest power producer protesting against a new property tax, and Portuguese workers staged a 24-hour general strike.
Credit ratings agency Fitch downgraded Portugal's rating to junk status, saying a deepening recession made it "much more challenging" for the government to cut the budget deficit, highlighting a vicious circle facing Europe's debtors.
German bonds fell to their lowest level in nearly a month after Wednesday's auction, in which the German debt agency found no buyers for half of a €6-billion, 10-year bond offering at a record low 2.0% interest rate.
The shortage of bids drove Germany's cost of borrowing over 10 years to 2.2 percent, above the 1.88 percent markets charge the United States and the 2.18% that heavily indebted Britain has to pay.
Bond investors are effectively on strike in the eurozone, interbank lending to euro area banks is freezing up, ever more banks are dependent on the ECB for funding, and depositors are withdrawing increasing amounts from southern European banks.
"It's quite telling that there has been upward pressure on yields in Germany – it might begin to change perceptions in Germany," Standard and Poor's head of sovereign ratings, David Beers, told an economic conference in Dublin.
In one possible response, people familiar with the matter said the ECB is looking at extending the term of loans it offers banks to two or even three years to try to prevent a credit crunch that chokes the bloc's economy.
Support for Italy
Sarkozy and Merkel also demonstrated their backing for Monti, an unelected technocrat, to surmount Italy's daunting economic challenges, in contrast to the barely concealed disdain they showed for his predecessor, media billionaire Silvio Berlusconi.
Monti repeated Italy's goal of achieving a balanced budget by 2013 but said there was room for a broader discussion about how fiscal targets could be adjusted in a worse-than-expected recession.
Italian bond yields' jumped this month to levels above 7 percent widely seen as unbearable in the long term, despite stop-go intervention by the ECB to buy limited quantities, triggering Berlusconi's fall.
Keeping Italy solvent and able to borrow on capital markets is vital to the sustainability of the eurozone. Key Italian bond auctions early next week will test market confidence.
German officials said the failed auction did not mean the government had refinancing problems and several analysts said Berlin just needed to offer a more attractive yield.
But it was a sign that, as the bloc's paymaster, Germany may face creeping pressure as the crisis deepens that may cause it to re-examine its refusal to embrace a broader solution.
Economy Minister Philipp Roesler of the Free Democratic junior coalition partner called for parliament to reject euro zone bonds "because we don't want German interest rates to rise dramatically".
But some market analysts are convinced joint debt issuance will eventually have to be part of a political solution to hold the eurozone together.
"Although it is not easy to see how the region will get to a fiscal union with Eurobonds, we believe that this is the path that will be chosen," JP Morgan economist David Mackie said in a research note.
With time running out for politicians to forge a crisis plan that is seen as credible by the markets, the European Commission presented a study on Wednesday of joint eurozone bonds as a medium-term way to stabilise debt markets alongside tougher fiscal rules for member states.
The borrowing costs of almost all eurozone states, even those previously seen as safe such as France, Austria and the Netherlands, have spiked in the last two weeks as panicky investors dumped paper no longer seen as risk-free.
Outside the eurozone, a top British financial regulator said British banks should make contingency plans for a potentially disorderly break-up of the currency area, or the exit of some countries, as the sovereign debt crisis rages on.
"Good risk management means planning for unlikely but severe scenarios and this means that we must not ignore the prospect of a disorderly departure of some countries from the eurozone," Andrew Bailey, deputy head of the Prudential Business Unit at the UK's Financial Services Authority, told a conference.