The sovereign debt crisis in the euro-zone continues to intensify and, last week’s meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy added to the malaise. The pair dismissed investor calls for an expansion of the European Financial Stability Facility (EFSF) and, rejected the idea that euro bonds, where member countries issue debt jointly, represented a viable solution to the region’s mounting difficulties. Belgium subsequently joined other member nations and voiced its support for euro bonds, but Chancellor Merkel continued to stress her objections to the idea, over the weekend:
"German Chancellor Angela Merkel attempted to shut the door on common euro-area bonds as a means to solve the debt crisis, saying that she won’t let financial markets dictate policy.
Joint euro bonds would require European Union treaty changes that would “take years” and might run afoul of Germany’s constitution, Merkel said. While common borrowing might arrive at some point in the “distant future,” bringing in euro bonds at this time would further undermine economic stability and so they “are not the answer right now.”
“At this time -- we’re in a dramatic crisis -- euro bonds are precisely the wrong answer,” Merkel said in an interview with ZDF television in Berlin yesterday. “They lead us into a debt union, not a stability union. Each country has to take its own steps to reduce its debt.”
Merkel has stepped up her opposition to euro bonds since returning from her summer vacation last week, making resistance to common European borrowing a campaign theme of Sept. 4 elections in her home state of Mecklenburg-Western Pomerania. Investor calls for euro bonds intensified last week as concerns about the debt crisis and a stuttering global economy drove European stocks to their lowest in more than two years.
“Politicians can’t and won’t simply run after the markets,” Merkel said in the chancellery interview, her first since returning from a three-week summer break. “The markets want to force us to do certain things. That we won’t do. Politicians have to make sure that we’re unassailable, that we can make policy for the people.”
The benchmark Stoxx Europe 600 Index dropped 6.1 percent to 223.13 last week to its lowest level since July 2009. The gauge, whose decline for a fourth week was led by banks and carmakers, has now sunk 23 percent from its February peak amid concern that policy makers are failing to tame the debt crisis.
Pledges of 365 billion euros ($526 billion) in official loans to Greece, Portugal and Ireland, and 96 billion euros of bond purchases by the European Central Bank have yet to fix the finances of those countries or prevent speculative attacks on Spain and Italy.
National benchmark indexes fell in every western European market except Iceland last week, with Germany’s DAX Index declining 8.6 percent, the U.K.’s FTSE 100 Index down 5.2 percent and France’s CAC 40 Index dropping 6.1 percent. Compounding investor concerns, statistics released Aug. 16 showed the German economy, Europe’s largest, almost stalled in the second quarter.
“I see nothing that points to a recession in Germany,” Merkel said. “But I see considerable long-term tasks ahead of us that have to do with markets regaining confidence in Europe and that have a lot to do with reducing debt.”
Merkel’s stance risks bringing her into conflict with the European Commission, the European Union’s executive body, which said Aug. 19 that it may present draft legislation on joint euro-area bonds after completing a feasibility report.
She is also at odds with Germany’s main opposition Social Democrats and their Green Party allies, both of which support euro bonds even as polls suggest a majority of the German public is against them. Germany would face extra costs of 47 billion euros a year if it aligned interest rates with nations that pay more to borrow, the Munich-based Ifo institute said on Aug. 17. Merkel’s two coalition partners, the Free Democratic Party and Christian Social Union, spoke out against euro bonds in weekend newspaper interviews.
German Finance Minister Wolfgang Schaeuble entered the fray two days ago in his first public engagement since the summer break, saying that the euro region would become an “inflation community” if member countries decided to sell bonds jointly without unifying their fiscal policies.
Common Finance Policy
“Unless there is a single financial policy in the euro area, there won’t be a single rate of interest” on debt sold, Schaeuble said at an open doors event at the Finance Ministry.
Schaeuble said that he’s prepared to cede sovereignty to the EU to achieve political union, even if most other EU members are not currently ready to do likewise, the Welt am Sonntag newspaper cited him as saying in an interview published yesterday. Schaeuble said he has no problem with the idea of a European finance minister, according to the newspaper.
EU President Herman Van Rompuy sided with Germany and France, ruling out issuing common bonds as a cure for the debt crisis at least until European economies and budgets are better aligned.
With three countries drawing financial aid and national debts ranging from 6.6 percent of gross domestic product in Estonia to 142.8 percent in Greece, this is the wrong time to set up a single borrowing agency, Van Rompuy said in an Aug. 20 interview on Belgium’s RTBF radio.
The German government aims to put changes to the European rescue fund and a second round of financial aid for Greece to a parliamentary vote on Sept. 23. That’s five days after a state election in Berlin, the last of seven regional votes this year which have seen Merkel’s Christian Democrats punished as voters railed against public bailouts of indebted euro-area countries.
Merkel, who said that she’s confident of a majority to pass the changes in parliament, called for the focus of Europe’s crisis-fighting strategy to remain on tackling debt. Decades of deficit spending in euro-area countries has turned the region into a “debt union” that requires each country to slash debt levels, she said.
“This is an arduous, difficult path that can’t be solved in one fell swoop, for instance with euro bonds,” she said."