Germany Goes Rogue, Confronts United Euro Bloc as Leaders Head to Summit
June 24th, 2012
Bloomberg / By Patrick Donahue
Germany will confront an increasingly united bloc of euro-area nations demanding more ambitious policies to save the currency union this week, as European leaders prepare for a summit setting the course for the currency’s preservation or ultimate demise.
As concern mounts over their banking systems and finances, Spanish and Italian leaders have added their voices to those calling for more decisive action, a counterpoint to Germany’s more incremental approach to solving the 2 1/2-year-old crisis. European Union leaders will attend pre-summit meetings as they work to to narrow differences before the June 28-29 gathering in Brussels.
“We are too close to the edge of the cliff for comfort, and the time to make big changes is awfully short,” Erik Nielsen, chief economist at UniCredit SpA (UCG) in London, wrote in a note to clients yesterday.
Chancellor Angela Merkel last week resisted attempts by the leaders of France, Italy and Spain to persuade Germany to accept faster action to ease sovereign-debt worries in the financial markets, delineating divisions on greater euro-area integration. The friction between Germany and the rest of Europe was illustrated on June 22 by the Bundesbank’s opposition to European Central Bank plans to help ailing banks.
Spanish and Italian borrowing costs retreated last week, aided by speculation that euro-area leaders will take more action. Spain’s 10-year bond yield receded to 6.38 percent on June 22 after climbing above 7 percent earlier in the week. Comparable Italian yields slid to 5.8 percent after climbing as high as 6.17 percent on June 18.
At a June 22 four-way summit meeting in Rome, Merkel faced a united front among her three interlocutors -- Italian Prime Minister Mario Monti, French President Francois Hollande and Spanish Prime Minister Mariano Rajoy -- on making the euro region’s rescue funds more flexible. She dismissed a Monti plan last week to use the funds -- the temporary European Financial Stability Facility or the permanent European Stability Mechanism -- to buy bonds, and spelled out her opposition to directly recapitalizing banks.
German taxpayers couldn’t back channeling funds directly to banks in other countries because they have no oversight of how the money would be used, Merkel told reporters in Rome. As chancellor, she only had such powers over German banks. “You would have a huge problem here,” she said. Merkel travels to Paris on June 27 for a pre-summit meeting with Hollande.
Merkel is worsening Europe's crisis because countries need growth, not austerity, to pay down their debt, billionaire investor George Soros said in a Bloomberg Television interview yesterday.
``Merkel has emerged as a strong leader,'' Soros, 81, said in an interview with Bloomberg Television's Francine Lacqua at his London home. ``Unfortunately, she has been leading Europe in the wrong direction.''
While the German leader has said repeatedly that counterparts in the euro area need to take a “step-by-step” approach and that there was no “big bang” solution to the crisis, Italy’s Monti said this week may prove critical to the euro’s survival.
Should leaders fail to produce a blueprint for a tighter fiscal and financial union, there will be “progressively greater speculative attacks” on the currency bloc’s more indebted nations, Monti told a group of European newspapers including Le Monde and El Pais on June 21.
France’s Hollande reiterated his support for jointly issued euro-area debt at the meeting, calling the so-called euro bonds “a useful instrument for Europe.” Merkel has consistently rejected the idea as premature.
“At the start of the crisis, we really had clear joint actions that worked,” ECB Governing Council member Ewald Nowotny said when asked about euro-area dissonance in a June 23 interview with Austrian state broadcaster ORF. “Now in the second phase, where we have much more differentiated problems, this no longer is the case.”
With the European Commission expecting the economies of the 17-nation euro area to shrink 0.3 percent overall this year and six of the member states to contract, the leaders of the four biggest economies unveiled a fleshed-out growth package to underscore their shift from austerity. As much as 130 billion euros ($163 billion) will be deployed, equivalent to 1 percent of the euro area’s economic output.
That amount “is not trivial,” UniCredit’s Nielsen said, though the stimulus’s punch would depend on the details. The funding will likely derive from unused EU funds, increased capital to the bloc’s regional-funding vehicle -- the European Investment Bank -- and project bonds, he said.
Possible steps toward a common banking system and the degree to which euro members surrender autonomy to Brussels may form the centerpiece of the summit agreement. While often reiterating that the bloc needs “more Europe,” Merkel, for example, rejects calls for a euro deposit-guarantee fund, saying such a measure would be inconceivable without more robust political union.
Proposals for common bank rules and supervision within the euro area are ambitious and would take time, Bank for International Settlements General Manager Jaime Caruana said in a speech in Basel yesterday.
“But setting out a common vision, an agreed objective and a clear mandate could help to break some of the adverse links that are making the euro-area crisis so severe,” he said. “Institutional development has not kept up with the needs of the monetary union.”
Underscoring Germany’s position outside the main European consensus was last week’s suggestion by the Bundesbank, the country’s central bank, that the ECB was wrong to relax some rules on the collateral that banks can offer in exchange for loans. “We’re critical of this,” Bundesbank spokesman Michael Best said June 22. In terms of collateral, “we won’t accept what we don’t have to accept,” he said.
More Germans would favor leaving the euro area than those in France, Italy and Spain, according to a poll published in four European newspapers yesterday. Some 39 percent of Germans would back such a move, compared with 28 percent of Italians, 26 percent of French voters and 24 percent of Spaniards, according to the Ifop-Fiducial survey.
This week’s cover of the German magazine Der Spiegel featured a defaced 1 euro coin with the title “If the Euro Breaks Up -- a Scenario.” Germany’s economy could shrink by as much as 10 percent in the year after a euro collapse, the magazine cited an unpublished study from the German Finance Ministry as saying.
The statistics suggest that the cost of rescuing the euro would be a lesser evil compared with returning to national currencies, Spiegel cited a ministry official as saying. Joblessness would soar to more than 5 million from less then 3 million today, the magazine reported.
The ministry “won’t take part in speculation about alleged secret papers,” spokeswoman Silke Bruns said yesterday in Berlin. She said she isn’t aware that such a study exists.
Meanwhile, German Finance Minister Wolfgang Schaeuble is considering the idea of a national referendum on further European integration, telling Spiegel that EU members need to move more power to Brussels “without every national state being able to block the decisions.”
Schaeuble didn’t say when a German referendum may be needed to approve the changes.
“A few months ago I would have said: in five years? Not in my lifetime! Now I’m not so sure,” he told Spiegel.
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