War of words for euro summit

 

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.

 
Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    0

    Comment number 118.

    115.BelPaese
    114 nautonier
    "Germany must leave the Euro or the ECB must print Trillions of Euros & devalue currency"

    What are the Dutch, the Austrians, the Finns, the Belgians etc. doing

    ++
    Nothing!
    They're all like flies around the rear ends of cattle - waiting to see what happens because Germany is the big player
    Germany has to decide whether to subsidise sun-med or leave the EZ

  • rate this
    0

    Comment number 117.

    Germany is the only pole left propping up the tent. If Germany left the Euro you can kiss it goodbye immediately. As it is, it seems pretty shaky. I wouldn't put one dime in it myself.

  • rate this
    -1

    Comment number 116.

    "WOTW is not around any more?"

    Why care? The majority of his postings on the EU crisis were utter and complete trash.

    Anyone can read a website and spew "facts." It takes years to actually UNDERSTAND all the issues that are involved, and you need to be an expert on human psychology, not economics.

  • rate this
    0

    Comment number 115.

    114 nautonier
    "Germany must leave the Euro or the ECB must print Trillions of Euros & devalue currency"

    What are the Dutch, the Austrians, the Finns, the Belgians etc. doing if Germany goes? If they are going to follow Germany (on which their economies depend) the whole idea crumbles. Assuming there's any way to convince Germany to quit such a cozy state of affairs for itself.

  • rate this
    0

    Comment number 114.

    Germany must leave the Euro or the ECB must print Trillions of Euros & devalue currency.

    Otherwise, Germany will obstruct fiscal & monetary union in defending its own taxpayers.

    An interesting & unexpected development - without Germany the EZ has enough size & resources to support a much weaker/competitive Euro & fend off the markets.

    Germany must leave the EZ or entire EU/ EZ will crash

 

Comments 5 of 118

 

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