June 22, 2012 7:07 pm
Eurozone rift deepens over debt crisis
Leaders of the eurozone’s four largest economies pledged on Friday to back a €130bn growth package and defend the common currency but remained divided over the credit crisis as Germany continued to resist proposals to issue common debt and use bailout funds to stabilise financial markets.
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The meeting in Rome was intended to demonstrate a coming together ahead of next week’s EU summit, but ended in disagreement over the need for short-term intervention in the markets and how to achieve greater political and financial union.
At a joint press conference Angela Merkel, German chancellor, declined to endorse affirmations by all three of her co-heads of government – Italy’s Mario Monti, François Hollande of France and Spain’s Mariano Rajoy – of the need to use the eurozone’s bailout funds to “stabilise financial markets”.
“We need to use all existing mechanisms to stabilise markets, to give confidence, to fight speculation,” Mr Hollande said. “This would be an important step,” he added, endorsing a proposal by Mr Monti that the bailout fund should be used to buy the debt of “virtuous” countries on the open market.
Instead, Ms Merkel said Europe needed to respect existing rules and had to work towards common structures to regulate the euro rather than have policies emanating from “17 parliaments each with national sovereignty”.
“If I am giving money to Spanish banks … I am the German chancellor but I cannot say what these banks can do,” she said.
The disagreements in Rome come amid heightened tensions within the eurozone over how to deal with the burgeoning crisis, particularly the imminent bailout of Spanish banks. Since the rescue was announced two weeks ago, Spanish borrowing costs have increased, leading senior EU officials to worry that the structure of the rescue has spooked private investors.
Under the current plan, as much as €100bn in bailout funds would be funnelled through the Spanish government, adding billions to Spain's sovereign debt. In addition, eurozone finance ministers meeting in Luxembourg failed to agree whether those loans would be given senior status over existing private debt holders, potentially scaring away more private investors.
While Germany has insisted on that structure, Luis de Guindos, the Spanish finance minister, said on Friday he believed there was still a chance of convincing other leaders of the necessity of injecting money directly into Spanish banks. French finance minister Pierre Moscovici also backed the move.
Olli Rehn, the EU's senior economic official, and Christine Lagarde, head of the International Monetary Fund, have both said direct injections into teetering banks should be adopted. Mr Hollande, in an indirect jab at Ms Merkel, said Europe could not wait 10 years before issuing common euro bonds to mutualise debt.
Adding to the note of discord, Mr Monti wrapped up proceedings by drily pointing out that the unravelling had begun back in 2003 when France and Germany were allowed – under Italy’s presidency – to breach their budget deficit limits.
One Italian official pointed out that the proposal to use bailout resources to buy Spanish and Italian debt on the open market had “not been shot down” by Germany, and that finance ministers would continue to work on the issue ahead of the June 28-29 summit.
Officials conceded, however, that the declaration by all four leaders of an agreed proposal to launch a €120bn to €130bn “growth” package was not new. Nicholas Spiro, a sovereign risk analyst, said the “rehashed” European growth compact was “another example of eurozone leaders desperately trying to paper over their differences while failing to address the issue which concerns investors the most: shoring up the sovereign debt markets of Spain and Italy”.
Mr Monti, who was appointed technocrat prime minister last November, is under intense pressure from Italy’s main parties to come away with tangible results from next week’s summit or face increased resistance to his economic reforms in parliament. His predecessor, Silvio Berlusconi, has already undermined Mr Monti by speaking openly of a possible Italian exit from the euro and by hinting that his centre-right party could try to force early elections.
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Copyright The Financial Times Limited 2012
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