Madrid/Berlin - European leaders sound unusually divided
before a high-stakes summit, with Germany's Angela Merkel saying total debt
liability would not be shared in her lifetime and giving little support to
Italian and Spanish pleas for immediate crisis action.
Rome and Madrid have seen their borrowing costs spiral to a
level which for Spain at least would not be sustainable as it battles to
recapitalise banks ravaged by a burst property bubble and cut a towering
Spanish Prime Minister Mariano Rajoy said on Wednesday he
would ask other European Union leaders to allow the bloc's bailout funds or the
European Central Bank (ECB) to stabilise financial markets.
parliament before a meeting of European heads in Brussels on Thursday and
Friday, Rajoy warned that Spain would not be able to finance itself
indefinitely with 10-year bond yields near 7%.
"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.
Even when there are profound disagreements, EU leaders have
been burned by the markets enough times to generally make sure they sound
united before major gatherings.
But divisions have been exposed by the ousting of Nicolas
Sarkozy by socialist Francois Hollande as French president and the fact that
Rome and Madrid have muscled into the traditional Franco-German axis.
The leaders held an unusually discordant news conference in
Rome on Friday.
Hollande said there must be more solidarity in Europe before
countries hand over more sovereignty over their national budgets, while Merkel
said she would not accept extra liabilities without overarching budget control.
The pair will have a working dinner in Paris on Thursday
evening, an opportunity to repair the damage.
An initial attempt to smooth over
differences came at a meeting of the four countries' finance ministers late on
Tuesday after which nothing was said.
In Rome, Italian Prime Minister Mario Monti said he would
not simply rubber stamp conclusions at the EU summit and said he was ready to
go on negotiating into Sunday evening if necessary to agree on measures to calm
With Hollande's support, Monti is pushing for the eurozone’s
rescue funds to be used to help limit the spreads over German Bunds on bonds
issued by countries that respect EU budget rules.
Rajoy would settle for that
or the ECB doing the same job by reviving its bond-buying
The proposal has run into stiff opposition from Germany, the
largest economy in the EU and the bloc’s effective paymaster, and
has been rejected by Jens Weidmann, the powerful head of the German central
bank, the Bundesbank.
Stock markets perked up last week on the hope that the 20th
EU summit since the bloc’s debt crisis exploded into the open in Greece would
come up with dramatic measures. Investors have since thought better of that
European shares edged up on Wednesday and the euro was flat,
with many investors out of the markets before the Brussels meeting.
“People are waiting for the inevitable - which is that
policymakers will probably fail to do what is necessary,” said Neil Mellor,
currency analyst at Bank of New York Mellon.
Merkel stomped on the idea of mutualising debt - favoured by
France, Italy and Spain - at a meeting of lawmakers from her Free Democratic
coalition partners in Berlin on Tuesday, according to people who attended the
“I don’t see total debt liability as long as I live,” she
was quoted as saying, a day after branding the idea of euro bonds “economically
wrong and counterproductive”.
The words may have been carefully chosen and do not at face
value rule out mutualising some portion of eurozone members’ debts as the end
point of a drive towards fiscal union.
Merkel finds herself in a dwindling minority but holds the
eurozone’s purse strings and therefore nearly all the cards.
German opposition SPD leader Sigmar Gabriel told the
Financial Times that urgent measures were needed to lower eurozone sovereign
borrowing costs, otherwise the currency bloc could “simply explode”.
Italy and Spain argue that they are stretching every sinew
to cut their debt mountains and need some support from their currency area
peers to keep the markets at bay.
Monti won the first two of four confidence votes on Tuesday
called to accelerate the passage of his labour reform that has been criticised
by both by labour unions and the business establishment.
The final two votes,
and definitive approval, are due on Wednesday.
Spain - which has been offered loans of up to €100bn to
recapitalise its banks but is determined not to ask for a sovereign
bailout - is considering raising consumer, energy and property taxes.
Spanish Economy Minister Luis de Guindos said he had talked
with the finance ministers of Germany, France and Italy already on Wednesday
with further discussions planned.
Eurozone finance ministers will also hold a conference call
on the bailout of Spanish banks and this week’s request for aid from Cyprus, EU
The request made Cyprus the fifth of the eurozone’s 17 states
to seek aid from EU rescue funds after Greece, Ireland, Portugal and Spain.
Underlining the parlous state of Spanish finances, figures
showed the central government’s deficit had already reached 3.41% of annual
gross domestic product through just the first five months of the year, close to
its target for the whole year of 3.5%.
Spain’s central bank said on Wednesday it expected recession
to deepen in the second quarter of the year.
The Brussels summit is expected to agree on a growth package
pushed by France worth around €130bn in infrastructure project bonds,
reallocated regional aid funds and European Investment Bank loans.
Leaders will also discuss proposals for a banking union, but
while they are likely to agree to give the ECB power to supervise big
cross-border banks, Merkel is resisting any joint deposit guarantee or common
bank resolution fund.