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Germany under pressure on ECB after bond sale failure

Published on 24/11/2011

The leaders of eurozone giants France, Germany and Italy were to hold emergency talks on Thursday in the shadow of a failed German bond auction that took the debt crisis to the core of the bloc.

France’s President Nicolas Sarkozy will urge Germany’s Chancellor Angela Merkel to abandon her refusal to allow the European Central Bank to become a lender of last resort and so shield national budgets from sceptical markets.

Germany is also under strong pressure to agree to the creation of eurobonds, pooling benchmark German bonds with bonds issued by governments which have lost market confidence and now face high, almost unsustainable, interest rates.

“It is urgent,” French Foreign Minister Alain Juppe said Thursday in a radio interview. “The situation is serious. We must not underestimate its gravity. It touches even the most solid economies.”

France’s minister for European affairs, Jean Leonetti, explained: “France eventually wants the European Central Bank to have the same role as the Federal Reserve in the United States. What’s going on is very abnormal.

“How can we explain that Germany is having trouble raising funds while it has a stable economy and while the eurozone has a four percent public deficit compared to 10 percent in the United States, eight percent in Japan?

“Why is the euro under attack? It’s simple. In the United States there’s a Federal Reserve. Europe has the European Central Bank, but the European Central Bank does not buy up sovereign debt if needed,” he argued.

Germany, while holding out firmly against such an expansion of the ECB’s role, is calling for changes to European treaties to enforce greater budget discipline on its heavily indebted partners.

But its EU allies warn that such measures would take too long and might prove politically impossible if hard-pressed voters suffering austerity programmes or eurosceptic governments like Britain’s reject new rules.

In an open letter to Merkel published in the German daily Handelsblatt, Luxembourg’s Foreign Minister Jean Asselborn said: “If you, dear chancellor, do get your wish … please do not forget the risk that the EU will implode.”

“Do I need to remind you that Spain and Luxembourg were the only countries in 2005 to vote ‘yes’ to the EU’s constitutional treaty?” he asked.

Italy’s Prime Minister Mario Monti will also come under scrutiny in Strasbourg, with eurozone countries anxious to ensure he implements promised reforms to shore up the Italian economy and halt the spread of the crisis.

French officials said the leaders would seek ways to “accelerate” reforms of eurozone financial governance, as the crisis threatens to spread to Spain and undermines confidence in even the French and German economies.

France is trying to retain its top AAA credit rating, which is also vital to the EU debt rescue fund called the EFSF.

Merkel is firmly opposed to the idea of freeing the ECB up to monetise eurozone debt, fearing this would undermine its limited inflation-busting mandate, and observers say it would take a catastrophe to change her mind.

But Germany’s position was highlighted dramatically on Wednesday by its failure to find buyers for more than two billion euros’ worth of 10-year bonds, an almost unprecedented rebuff from the markets to Europe’s strongest economy.

German bonds are the gold standard of eurozone debt but Berlin managed to draw bids of only 3.9 billion euros for a six-billion-euro auction, indicating investors are now sceptical about even the safest European assets.

“This auction follows a last Monday’s weak Dutch three-year auction and it shows how fast the contagion is spreading from periphery to the eurozone core area,” said analyst Alessandro Giansanti of ING Debt Strategy.

For the moment, Sarkozy’s entreaties seem likely to fall on deaf ears.

“The economic and monetary union is based on a central bank which has as its sole responsibility the maintaining of price stability,” Merkel said on Wednesday, to loud applause from the German parliament.

“That is its mandate, it is carrying it out … and I am firmly of the opinion that this mandate should not, absolutely not, be changed,” she said.

Analysts told AFP that only a sharply deeper crisis — such as a situation in which Spain and Italy could no longer refinance their debt through private bond markets — could conceivably change Berlin’s mind.

“Unfortunately, we are in the paradoxical situation where we are pinning all our hopes on a new catastrophe for Berlin finally to move,” said Christian Schulz, an economist at Berenberg Bank.

Sensing an opening for deeper European integration, the European Union has begun to push for sweeping new powers to override national budgets and issue joint eurozone bonds to pool member state debts and share risk.

Again, Germany is cool on this proposal.

Meanwhile, US-based banking lobby the Institute of International Finance, warned the eurozone “has tipped into what we believe to be a recession, which will only serve to widen budget deficits and weaken bank asset quality.”

Nevertheless, Europe’s main stock markets rose at the start of trading on Thursday, amid hopes that the Strasbourg meeting would bear fruit.