Publications
Partners
Brussels - Deep divisions emerged Monday over a call to launch joint eurozone bonds as finance ministers opened talks with IMF head Dominique Strauss-Kahn amid calls to boost their bailout war chest.
The talks are seen as paving the way for a summit of European Union leaders next week.
Analysts are convinced a trillion-dollar joint EU-IMF emergency fund for countries in financial disarray will need increasing amid expectations that Portugal will be next to tap it after Ireland.
But German Chancellor Angela Merkel made it clear she was not inclined to approve an increase in the fund at the moment.
Merkel in addition expressed fierce resistance to a plan to issue joint bonds that is to be discussed by eurozone ministers.
Yields on debt held by Portugal and other under-pressure eurozone economies fell late last week, but the movement was attributed to a vast bond-buying spree launched by the European Central Bank.
That policy has eased the cost of borrowing for now, but European nations are finding it hard to obtain funds on open markets at rates sustainable in the long term, giving rise to efforts to design a structural solution.
Statements by leading EU figures and comment by analysts have raised the possibility of major changes to the spirit and maybe letter of existing eurozone treaties.
Article 103 of the original Maastricht treaty, and then the Stability and Growth Pact, were based on the principle that all members of the EU would treat management of their economies as a matter of common interest while retaining national power over budgets and taxation.
As countries joined the eurozone they would pursue national budget discipline towards generating surpluses and would reduce debt as part of wider policies to ensure convergence of weak economies with the strong.
But these commitments to sovereign discipline have broken down as evidenced by rescues for Greece and Ireland and with Portugal and Spain perceived to be at risk.
Jean-Claude Juncker, head of the Eurogroup of finance ministers, and Giulio Tremonti, Italy's finance minister, in an article Monday in the Financial Times called for the rapid introduction of "E-bonds."
The pair wanted to send a message to markets and European citizens about "the irreversibility of the euro" and said the plan would lead to a "liquid global market for European bonds" that would help protect countries from speculation and attract new capital flows into Europe.
But Germany, Europe's biggest economy, flatly rejected the plan, with Merkel arguing that "competition on interest rates is an incentive to respect stability criteria."
Austrian Finance Minister Josef Proell also came out as "very, very critical" of the plan, further backed by Dutch counterpart Jan Kees de Jager, although Greek premier George Papandreou said it was worth discussing.
Berlin fears joint bonds would raise its own borrowing costs and effectively force it to permanently subsidise the rest of a currency bloc, which is set to expand to 17 nations with Estonia's entry on January 1.
While the European Union's economic affairs commissioner, Olli Rehn, described such bonds were "intellectually attractive," commission president Jose Manuel Barroso said it was an "old idea." Neither showed much optimism for the proposal.
Of greater importance eventually, Rehn implied, would be the latest discussions on upgrading the European Union's existing 440-billion-euro contribution to the rescue fund.
Spanish Finance Minister Elena Salgado said IMF Managing Director Strauss-Kahn would likely recommend an early increase - before a permanent replacement for the facility comes into being in mid-2013.
The current EU chair, Belgian Finance Minister Didier Reynders, wants Europe's fund increased when its permanent successor is established in mid-2013, if not before.
It should be endowed with "a huge amount of money, because if we don't do that you always have speculation," he said.
GFT analyst David Morrison said traders had "an expectation" that governments "will look to boost the EU-IMF bailout facility."
Ireland's €67.5bn in overseas loans and guarantees are due to be approved when the talks expand to include all EU nations on Tuesday, although domestic politics may interfere in the form of deep opposition to an austerity budget on Tuesday.
