Merkel insists on fiscal union before debt sharing

Merkel Hollande June 2012_Small.jpg

German Chancellor Angela Merkel will pit herself against France and Italy today at an EU summit that could shape the eurozone's future, insisting they must put the bloc's fundamental problems ahead of pleas for emergency action.

On the eve of the EU summit, Merkel brushed aside demands from Italy and Spain for rapid action to lower their soaring borrowing costs, and poured cold water on proposals backed by France that eurozone countries should assume joint liability for each other's debts.

"I fear that at the summit we will talk too much about all these ideas for joint liability and too little about improved controls and structural measures," she told parliament in Berlin on Wednesday.

French President Francois Hollande is championing joint "eurobonds" to bring down borrowing costs for the weaker eurozone countries as the pool of guarantors would include the strongest – meaning Germany.

Merkel: Long-term fixes first

But before the summit – the EU's 20th since the crisis began – Merkel repeated her objections to the plan, saying even Europe's strongest economy must not be overburdened.

She left the door open to eventual joint debt issuance. But she offered no immediate moves to ease the crisis and insisted governments must commit to giving EU institutions the power to override their budgets and make them change policy before there could be any shared liability for Europe's debt.

"Joint liability can only happen when sufficient controls are in place," she said.

The remarks appeared to be a less definitive rejection of common eurozone bonds than she made behind closed doors on Tuesday, when she said she did not expect to see shared debt liability in her lifetime.

Paris meeting

Meeting in Paris on the summit's eve, Hollande and Merkel sought to play down their divisions.

Apparently responding to Merkel's calls for greater fiscal federalism to save the single currency, Hollande enigmatically said that the eurozone required "integration as much as necessary" and "solidarity as much as possible."

"We both want to deepen economic, monetary – and in the future political-union, to arrive at integration and solidarity," Hollande said.

"We need more Europe, we need a Europe that works, the markets are expecting this, and we need a Europe whose members help each other," Merkel added.

Spanish and Italian pleas

Merkel's insistence that the summit focus on long-term fixes put her at odds with Spanish Prime Minister Mariano Rajoy, who said he would ask other EU leaders to allow the bloc's bailout funds or the European Central Bank to stabilise financial markets.

"The most urgent issue is the one of financing. We can't keep funding ourselves for a long time at the prices we're currently funding ourselves," he told parliament.

Spain has been seeking a temporary mechanism to fund four nationalised banks that urgently need money, since it could take three to four months for the European aid to reach the country's financial system.

In Rome, Italian Prime Minister Mario Monti said he would not simply rubber stamp conclusions at the EU summit and was ready to go on negotiating into Sunday evening if necessary to agree on measures to calm markets.

With support from French President François Hollande, Monti is pushing for the eurozone's rescue funds, backed by the European Central Bank, to be used to bring down Spanish and Italian borrowing costs. Rajoy would settle for that or the ECB doing the same job by reviving its bond-buying programme.

Divisions on display

Both proposals have run into stiff opposition from Germany, the bloc's effective paymaster, and have been rejected by Jens Weidmann, the powerful head of the German central bank, the Bundesbank.

EU divisions have been more openly displayed since Hollande, a Socialist, ousted conservative Nicolas Sarkozy as French president last month, challenging Merkel to move away from austerity, promote economic growth and mutualise Europe's debts.

Merkel finds herself in a dwindling minority in the EU, backed only by the Netherlands and Finland, but she holds the eurozone's purse strings and therefore nearly all the cards.

One senior eurozone source said there would be no short-term decisions for market consumption at the summit – no direct recapitalisation of banks by the ESM, and no bond buying.

The Brussels summit is expected to agree on a growth package pushed by France worth around €130 billion in infrastructure project bonds, reallocated regional aid funds and European Investment Bank loans.

European Commission President José Manuel Barroso has said he will propose a roadmap and "calendar" for more European integration at the next summit of EU leaders on 28-29 June, without discarding the possibility of a treaty change aimed at injecting more federalism into the Union.

European Council President Herman Van Rompuy will present a report on 28 June exploring ways to deepen economic integration, including the subject of Eurobonds, which would pool part of European debt and reduce the borrowing costs of fragile economies like Spain or Italy.

  • 28-29 June: EU summit in Brussels to examine proposed "roadmap" for further economic and monetary union in the euro zone.
  • 18-19 Oct.: Interim report submitted to EU leaders at Brussels summit.
  • 13-14 Dec.: Final report to propose "specific and time-bound roadmap" to achieve "genuine" economic and monetary union.

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