German Leader Rules Out Rapid Action on the Euro
STEVEN ERLANGER and NICHOLAS KULISH
Nov 24, 2011 at 12:01 AM Nov 25, 2011 at 3:04 AM
Chancellor Angela Merkel repeated her opposition to bonds from euro zone countries and an expansion of the European Central Bank's role as quick responses to the sovereign debt crisis.
PARIS — Quashing recent speculation of a softening in Germany's hard-line stance on the euro, Chancellor Angela Merkel repeated on Thursday her firm opposition either to bonds issued jointly by the euro zone countries or to an expansion of the role of the European Central Bank as quick responses to the sovereign debt crisis.
"Nothing has changed in my position," she said at a news conference with Prime Minister Mario Monti of Italy and the French president, Nicolas Sarkozy, in Strasbourg, in eastern France.
But with signs of spreading contagion — a weak bond sale on Wednesday in Germany that lifted rates there, rates on sovereign debt rising to unsustainable levels in Italy and Spain, and interbank lending in Europe beginning to dry up — questions remained about just how long Germany can resist the persistent calls for action.
The German newspaper Bild reported Thursday that the Merkel government was inching toward accepting so-called euro bonds, at least in some form, even if the public stance remained against them, and that some of her party said there could be a trade-off for treaty changes. "We aren't saying never," Norbert Barthle, a legislator from her coalition, told journalists. "We're just saying no euro bonds under the current conditions."
That could be some time. France and Germany say euro bonds will make sense only down the road, when there is more convergence and growth, and when Paris and Berlin will not be on the hook for all the other weaker economies. France, however, wants to use the European Central Bank more aggressively to backstop vulnerable euro zone economies while they reform themselves.
Mrs. Merkel and other German officials fear that giving in to the calls for collective bonds or using the European Central Bank as a lender of last resort will ease pressure on the debtor nations, allowing them to avert the drastic structural changes that Berlin says that they need to make to become competitive, while making Germany and other creditors liable for their debts.
There was no hint of any softening from Mrs. Merkel after the leaders of the three largest economies in the euro zone met Thursday to try to reassure the markets about the future of the currency, vowing to work together on German-inspired treaty changes to promote more economic discipline and convergence.
Those treaty changes, which could take years to draft, ratify and put in effect, will have little impact on the current market anxiety over the euro, which has seen the interest rates on Italian, Spanish and French bonds rise sharply over German ones, and a growing distaste among investors even for the previously rock-solid German bonds.
The three leaders finished their luncheon meeting in Strasbourg by expressing confidence that the independent central bank would do the right thing for the currency, presumably continuing to buy enough bonds to keep the interest rates on European sovereign debt from becoming unsustainable.
"We all stated our confidence in the European Central Bank and its leaders, and stated that in respect of the independence of this essential institution we must refrain from making positive or negative demands of it," Mr. Sarkozy told the news conference.
But Mr. Sarkozy's frustration with German intransigence was evident. "I am trying," Mr. Sarkozy said, "to understand Germany's red lines."
Mr. Sarkozy, who has been pressuring Berlin to let the bank act more decisively to support Italy and Spain and halt a rush out of euro zone bonds and banks, said that joint proposals to modify European Union treaties would be presented ahead of a summit meeting on Dec. 9. The modifications, sought by Germany but supported by France, would allow the European Union greater oversight of national budgets and statistics, create debt limits for governments and try to create more convergence on policies like pension ages and tax levels.
But Mrs. Merkel made it clear that any new treaty changes would not touch the charter of the central bank.
The markets were predictably disappointed with the German position. The yield on Italian 10-year bonds, the broad cost of government borrowing, crept back above 7 percent on Thursday as European stocks fell for a sixth day. The markets were also affected by remarks from the chief economist of the Organization for Economic Cooperation and Development, Pier Carlo Padoan, who warned in an interview with the newspaper La Stampa that while a euro-zone recession could still be avoided, forthcoming forecasts showed "declining and very weak growth."
But on Thursday, as growth figures for Europe neared recession levels, the ratings agency Fitch downgraded Portugal's debt to junk status, in the latest sign investors are growing warier about the ability of euro zone countries to repay their debts.
France, weaker than Germany, has tried to pull Berlin along toward a more activist posture. The French prime minister, François Fillon, told members of the governing party this week that "we are stuck with a major difficulty — to convince Germany that we should arm the euro zone with an instrument of defense for our currency with a certain evolution of the role of the central bank."
The bank, which is independent by charter, has been bending its rules and was authorized by the euro zone countries in July to buy bonds in the secondary market, at least until a separate European Financial Stability Facility was functioning at a larger figure of 440 billion euros. That happened only in mid-October, but it is not large enough to cover Spain and Italy, and efforts to leverage it upward and find new funds for it have so far failed. So the bank has kept buying.
Some economists, like Richard Portes of the London Business School, have argued that the bank, in the name of monetary stability, could move to cap the spreads on bonds by simply announcing that it would buy any euro zone bonds at a certain rate. But the bank's board would need to feel it has political cover for such a policy, Mr. Portes said.
"It's very hard for Germany to bail out other European countries unless it's on the verge of catastrophe," said Jakob von Weizsäcker, an official at the economics ministry of Thuringia State and a fellow at Bruegel, a Brussels research institution. His concern was that leaders may not be able to react fast enough to a crisis, like a run on the banks.
"My main worry is that the kind of bank run you would expect could go very fast. Then you're left with the shatters of the euro and the shatters of the misguided policy," Mr. von Weizsäcker said.
The three leaders of the three largest economies agreed to meet again in Rome. It was a sign that with Mr. Monti at the helm rather than Silvio Berlusconi, Italy could play a larger role in forging policy. Mr. Sarkozy and Mrs. Merkel have led what at times has seemed like a French-German dialogue to the exclusion of other member states, prompting criticism that European structures were being bypassed.