War of words for euro summit

  • 27 June 2012
  • From the section Business
  • comments

The Italian Prime Minister says he's not going to this week's leaders' summit to "rubber stamp" pre-agreed proposals.

He says he'll stay in Brussels all weekend, if that's what needed to make serious progress.

Perhaps. But listening to the pre-summit rhetoric from the German side, you wonder whether two more days talking would make much difference.

According to press reports, Chancellor Merkel said yesterday there would be no collective guarantees of euro area member country debt "as long as I live".

As denials go, that sounds pretty emphatic.

Prime Minister Monti will not be happy to hear that. But what made him really cross was the Bundesbank President, Jens Weidmann, last week dismissing Monti's proposals to use the two rescue funds, the EFSF and the ESM, to buy the sovereign bonds of countries like Italy or Spain to keep their borrowing costs at reasonable levels.

As I said in my Monday post, most people are deeply sceptical about this proposal if it simply means the EFSF or the ESM running down their funds buying Italian debt.

If they are to have any traction in the financial markets, those bond purchases cannot have a 100bn-euro or 200bn-euro price tag attached to them. So, for this to be a realistic proposal, Germany needs to be willing to allow the ESM to obtain a banking licence, so it can borrow much larger amounts from the ECB.

This is what Chancellor Merkel rejected at last year's July summit. At the time, President Sarkozy boasted that the leaders had nonetheless paved the way for a "European Monetary Fund' by agreeing to let the rescue funds participate directly in the market.

However, as many noted that boast was not very credible as long as the funds had such limited resources - and there was no true "lender of last resort".

Since then, the rescue funds have grown considerably, but so has the crisis.

A year ago, when the leaders were preparing for that July summit, the gap between the interest rate on Spanish and German 10-year government debt was around 2.8 percentage points. Today the gap has risen to more than 5.3 percentage points. The gap for Italy has risen from just over 2 percentage points to over 4.5 points.

Perhaps the denials from Angela Merkel, Jens Weidmann et al will leave room for a compromise on Friday.

Perhaps Mario Draghi will once again bring the ECB to the rescue, after the central bank's regular meeting next week, by agreeing to give the ESM a banking licence after all.

Or maybe Germany will sign up, after all, to some variation of the "Redemption Fund" proposal from Germany's own "wise men", which would involve guaranteeing only a proportion of each government's debt, for a finite period of time.

But, when I interviewed Secretary of State Kampeter in Berlin, he was very explicit in rejecting that idea as well.

There is always a war of words in the lead up to these "make-or-break" summits. But so far this one doesn't seem to leave much room for a truce that could lift the gloom hanging over eurozone markets.