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Germany rules out pooling of eurozone debt

Category : Business

Angela Merkel made it clear she will not yield to pressure for the common issuance of eurozone debt in the form of eurobonds

Germany has flatly ruled out any pooling of eurozone debt in response to the single currency crisis, seeming to set the scene for clashes at an EU summit which looks unlikely to take any big decisions to quickly stabilise the euro.

Chancellor Angela Merkel sharply criticised a seven-page blueprint from four senior EU leaders opening the way to a eurozone political federation and made it clear she would not yield to intense pressure to move towards the common issuance of eurozone debt in the form of eurobonds to lower the cost of borrowing for vulnerable countries such as Spain and Italy.

Merkel’s tough stance appeared to open up the prospects for a clash with Mario Monti, the increasingly beleaguered Italian prime minister, who is trying to restructure Italy’s creaking economy but is impotent in the face of the financial markets raising the price he pays to borrow. Italy was forced to pay 2.96% to sell six-month bills, up from 2.1% a month ago. Its benchmark 10-year yield was up slightly at 6.22% and faces a key test with an auction of €5.5bn of five and 10-year bonds.

There were no signs of any concessions from Merkel either towards President Francois Hollande of France who will use the summit to proclaim he has forced the EU or the eurozone to adopt policies shifting the emphasis from austerity and spending cuts to a growth and jobs agenda.

The summit is likely to agree a “growth pact” nominally dedicating €130 bn to foster jobs creation and infrastructure projects.

But the scheme is essentially an exercise in repackaging already agreed measures or re-directing already committed EU funds.

Merkel told parliament in Berlin, before going off to Paris to see Hollande, that she would not allow “Germany to be overstretched” by bankrolling borrowing to save the euro.

Unusually, she predicted “controversial discussions” at the two-day summit, signalling that she was ready for a row.

“I fear that at [the summit] there will again be far too much talk about all possible ideas for common liability and far too little about better controls and structural measures,” said Merkel. Eurobonds, eurobills, or a debt redemption fund — all ways of pooling eurozone debt liability — were illegal and anyway counter-productive, Merkel declared.

On Tuesday Herman Van Rompuy, the president of the European Council who chairs the summits, unveiled an ambitious blueprint for the building of a eurozone political union within a decade, entailing the surrender of considerable powers to Brussels by national capitals.

Merkel attacked the plan as again being too keen on pooling liability with not enough emphasis on fiscal discipline. Senior French officials said, by contrast, that Hollande was “at ease” with the blueprint which was “balanced.”

“The Germans say it is a French report. The French say it is a German report,” said a senior EU official involved in the summit preparations. “The truth is it’s somewhere in-between.”

EU and French officials agreed that the two-day summit is the most important in years, probably since the 1990s, but it could end in a stalemate that rattles the markets and increases the pressure on the euro from Monday.

There was talk in Brussels of coming up with short-term measures to relieve the market pressure on Spain and Italy.

The leaders are likely to take the first steps towards establishing an EU or eurozone banking union, with the aim of setting up common systems for winding up bad banks, recapitalising them, and standing behind savers’ deposits under the overall authority of the European Central Bank in Frankfurt. Britain wants nothing to do with it and there are certain to be conflicts in the months ahead as the Cameron government seeks to quarantine the City from the new regime’s remit.

But the banking union proposal is hugely complex. The devil is in the detail. While many of the governments say they support it, they will be at odds over its scope and powers.

A third of EU countries also look likely to press ahead with moves to launch a levy on financial transactions or Tobin tax. The tax is strongly supported by Hollande and by Austria. Merkel said that the Germans had signed up nine countries in support, the number required for so-called “enhanced cooperation” policies under the Lisbon Treaty.

Critics say introducing the tax in only nine countries will distort the market and trigger an exodus of financial institutions to other places. Adherents say you have to start somewhere and more will join later.

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