Merkel vs. Italy, France, Spain – will she bend?

http://www.theglobeandmail.com/report-on-business/merkel-vs-italy-france-spain-will-she-bend/article4376009/?

Angela Charlton and Don Melvin

BRUSSELS — The Associated Press

Published Thursday, Jun. 28 2012, 6:01 AM EDT

European leaders gathering Thursday in Brussels are set to sign off on a series of measures to boost economic growth but expectations of a breakthrough on the pooling of debt have fallen by the wayside.

 

French President Francois Hollande, right, welcomes German Chancellor Angela Merkel at the Elysee Palace in Paris, June 27, 2012. +

Germany’s Chancellor Angela Merkel, who has resolutely opposed the issuing of mutual debt, is the woman to watch – or fear, or confront – at the two-day summit.

Many leaders have backed the idea of euro bonds as a key way of fixing the euro zone’s problems as they would help lower indebted countries’ borrowing costs. But Ms. Merkel has been reluctant to expose her country to new potential costs, and is concerned that euro bonds may minimize the pressure on countries like Greece and Spain to reform their economies.

The plan to stimulate growth, and so increase government tax revenues, is relatively modest. Though worth €130-million ($162-million U.S.), it is expected to consist mostly of European funds already earmarked for development.

Far more urgent, in the short term, is finding a way to keep the cost of borrowing money sustainable for weaker EU countries.

The leaders of Italy, France and Spain are pressing Germany to agree to share debts before markets push the euro zone any closer to collapse. The EU’s top officials and the International Monetary Fund have argued the same.

Markets and investors, who felt burned in the past by promises they saw as too weak to solve Europe’s debt crisis, want a breakthrough this week to ensure the region’s debt crisis doesn’t engulf the world economy, but they aren’t expecting one.

Any breakthrough would hinge on Ms. Merkel.

Ms. Merkel isn’t likely to budge. She has argued repeatedly – as recently as Wednesday – that short-term solutions such as pooled debt or a more active European Central Bank are useless unless governments prove they can manage their budgets. She wants a grand, ambitious political union first.

And she brings the weight of the continent’s biggest, strongest economy with her to the meetings in Brussels.

While they may not be able to change Ms. Merkel’s mind, other leaders who avoided confronting her in the past may not hold back this time.

Italy’s Prime Minister Mario Monti, at risk of losing his job because of voter frustration with austerity measures, is increasingly outspoken.

Speaking in Brussels on Wednesday night, he said Italians have made great sacrifices and gotten their country’s deficit under control. But yields on Italian debt soared to one-year highs anyway.

If Italians become discouraged that their efforts aren’t helping, then Mr. Monti warned of “political forces which say ‘let European integration, let the euro, let this or that large country go to hell’, which would be a disaster for the whole of the European Union.”

Mr. Monti said he’s ready to work until Sunday night – instead of the scheduled Friday end of the summit – to ensure that leaders produce a growth package convincing enough to calm financial markets.

Spain’s prime minister is sounding especially desperate.

“The most urgent issue is financing,” Mariano Rajoy said Wednesday. “We can’t continue for a long time to finance ourselves with these prices; there are many institutions and financial entities that don’t have access to financial markets.”

Simon Tilford of the Center for Economic Reform said, “We’re seeing the French, Italians and Spanish showing a greater readiness to act as one.”

In the past, they were reluctant to isolate Ms. Merkel, he said. “But that flexible approach … has delivered very little. They have grown alarmed and frustrated,” he said. “If anyone is to lead the charge, it may be Monti, he is the one who has the most credibility on the European stage” – and the most to lose if pressure on Ms. Merkel fails.

While France has been the traditional partner – and counterweight – to Germany in European dealings in the past, President François Hollande has just seven weeks of governing under his belt, and built his career as a consensus-builder instead of a confrontational rabble-rouser. And his country’s economy is weaker, with growth forecast at just 0.4 per cent this year.

Mr. Hollande was grinning broadly Wednesday night at the one concession he has been able to wring from Ms. Merkel so far, an agreement to put growth on the European agenda alongside austerity measures.

Ms. Merkel, standing stiffly at Mr. Hollande’s side ahead of bilateral talks in Paris, agreed to push for the €130-billion stimulus package that Mr. Hollande has vaunted, even though it is largely just a repackaging of existing EU funds. Shortly after his meeting with Ms. Merkel, Mr. Hollande talked to President Barack Obama about their common push for growth.

Even if leaders of all 26 other EU nations line up against Ms. Merkel, she cannot bend very far.

She needs Parliament to approve the euro zone’s permanent rescue fund, the European Stability Mechanism, and a European budget-discipline pact, both expected to happen Friday. And many measures floated as possible solutions could require changes to Germany’s constitution.

Amid calls for Greece or other Mediterranean states – and even Germany – to pull out of the euro, Ms. Merkel argued Wednesday for greater unity. “We need more Europe. Markets are waiting for that.”

But she also insisted that jointly issued euro bonds – which some experts say would help defuse the prospect of unaffordable bailouts for Spain or Italy by making their debt less expensive to pay off – would be “economically wrong and counterproductive” before governments have shown they can comply with budget rules.

“Supervision and liability must go hand in hand,” she said.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s