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22Jun12
Euro's big four agree growth boost, split on bonds
German Chancellor Angela Merkel resisted pressure on Friday for common euro zone bonds or a more flexible use of Europe's rescue funds but agreed with leaders of France, Italy and Spain on a 130 billion euros ($156 billion) package to revive growth.
After four-way talks in Rome's Renaissance Villa Madama, Italian Prime Minister Mario Monti said the European Union should adopt pro-growth measures worth about 1 percent of the region's gross domestic product at a crucial summit next week.
But the three others made no perceptible progress in pushing Merkel, who leads Europe's most powerful economy and the main contributor to its rescue funds, towards mutualising Europe's debts or using existing bailout resources more flexibly.
"Growth can only have solid roots if there is fiscal discipline, but fiscal discipline can be maintained only if there is growth and job creation," Monti told a joint news conference after talks that lasted just an hour and 40 minutes.
The measures, already in the works in Brussels, include increasing the European Investment Bank's capital, redirecting unspent EU regional aid funds and launching project bonds to co-finance major public investment programs. No new steps were announced on Friday.
The four leaders did agree to move ahead on creating a tax on financial transactions even though not all EU members will be on board. About a dozen EU states support setting up the so-called "Tobin tax", more than the nine required to go ahead as a group within the EU, a French presidential source said.
Merkel made no mention, however, of any move towards mutualising past euro zone debt or new borrowing.
French President Francois Hollande voiced impatience with Berlin's reluctance, saying it should not take 10 years to create jointly underwritten euro bonds.
He said greater solidarity was needed among member states before they abandon more sovereignty to EU institutions.
"I consider euro bonds to be an option ... but not in 10 years," Hollande said in a direct challenge to Merkel. "There can be no transfer of sovereignty if there is not an improvement in solidarity."
The German position essentially amounts to the reverse. Merkel argues that members of the 17-nation currency union must transfer control over national budget and economic policies to Brussels before Germany would consider common debt issuance.
"Liability and control belong together," she said, citing as an example that EU treaties ruled out letting euro zone rescue funds lend directly to Spanish banks because only the Spanish state could enforce conditions on the banks.
The contrasting comments left much work for diplomats to produce a convincing blueprint for closer fiscal and banking union at a full EU summit next Thursday and Friday, which Monti called a defining moment in the crisis.
That plan is expected to include the first steps towards a banking union, starting by putting the European Central Bank in charge of supervising large cross-border euro zone banks.
Without progress on bank sector integration or other financial stability measures, France is not ready to commit to ratifying an EU budget discipline pact agreed earlier this year, French diplomatic sources said.
Spanish Bailout?
Dangerously high Spanish borrowing costs eased a little on market hopes for policy initiatives at the Brussels summit.
The European Central Bank took a supportive step on Friday, relaxing its collateral rules to let financial institutions pledge a wider range of assets in exchange for cash. The move helps counter the impact of credit rating downgrades.
If it falls short, Madrid may be pushed closer to eventually needing a sovereign bailout.
Without a convincing result, "there would be progressively greater speculative attacks on individual countries, with harassment of the weaker countries", Monti said in an interview with several European newspapers ahead of the mini-summit.
"A large part of Europe would find itself having to continue to put up with very high interest rates that would then impact on the states and also indirectly on firms. This is the direct opposite of what is needed for economic growth," he said.
The technocratic Italian premier, who needs a success to shore up his weakening domestic authority, sounded slightly more optimistic after the talks, saying next week's summit should "put at ease the financial markets' expectations", switching to English to add: "The euro is here to stay and we all mean it."
Spanish Prime Minister Mariano Rajoy, on the brink of requesting up to 100 billion euros in euro zone rescue funds to recapitalize struggling banks, said the four had agreed "to use any necessary mechanism to obtain financial stability in the euro zone".
An audit released on Thursday found Spanish banks would need up to 62 billion euros in extra capital to weather adverse circumstances.
After a meeting of euro zone finance ministers late on Thursday, IMF chief Christine Lagarde demanded rapid progress on a number of other fronts, raising the heat on Merkel.
Lagarde said a banking union was a top priority, alongside fiscal union and the principle of mutualising debt. Germany refuses to countenance common bond issuance and will not soften until economic union is complete. It is also opposed to the early introduction of a bloc-wide bank deposit guarantee scheme.
High Stakes for Monti
While Spain's needs are most pressing - its medium term borrowing costs hit a euro era high at auction on Thursday - the political stakes may be higher for Italy's Monti.
With his popularity sinking, the parties that back Monti in parliament are increasingly reluctant to support his reform proposals at home, but demand he get results in the European arena to ease the pressure on Italy's recession-bound economy.
"Monti knows he has to get his ducks in a row on the European side so he can tell the parties that he's sorted that part out, and now it's their turn to help sort out Italy," said James Walston, politics professor at Rome's American University.
Though hugely popular when he came to office in November, Monti's approval rating has halved as tax hikes and pension cuts exacerbated an already severe recession, and his labor reform estranged both unions and the business establishment.
But for the markets, Monti remains the man most likely to tackle Italy's debt mountain and uncompetitiveness. If he comes under serious threat, Italy could quickly supplant Spain as the euro zone's main flashpoint.
Monti's hand was weakened by comments on Wednesday by his predecessor, Silvio Berlusconi, who said the prospect of Italy quitting the euro was "not blasphemy" and that he failed to understand why it would hurt Italy's economy.
Berlusconi's People of Freedom party is one of the two main groups that guarantee Monti a majority in parliament.
Monti proposed on the sidelines of this week's G20 summit using the euro zone's rescue funds to buy the bonds of Spain and Italy to bring down their borrowing costs.
Hollande said after Friday's talks he supported the Italian idea. But Merkel has played down the notion, which investors said might be counter-productive by quickly burning through scarce rescue capital, unless the European Central Bank stepped in decisively in support.
Other proposals from Monti, such as stripping some forms of public investment from budget deficit calculations, or commonly issued euro zone bonds, are also broadly supported by France and Spain but opposed by Germany, at least for now.
[Source: By Giuseppe Fonte and Gavin Jones, Reuters, Rome, 22Jun12]
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