German Chancellor Angela Merkel’s meeting with French President Nicolas Sarkozy today comes as investors clamor for indications that they will do more to stamp out the euro area’s debt crisis as their economies sputter.
After a July 21 European Union agreement to bolster the region’s rescue fund failed to calm markets, calls are growing for the leaders to begin discussing joint borrowing or a mutual guarantee among the 17 euro states, policies that both countries have rejected until now. While not on the agenda, the issue will probably come up at a joint press briefing scheduled for 6:30 p.m. Paris time after the talks.
Merkel and Sarkozy may announce proposals that “go in the direction” of joint euro-area bonds, Peter Bofinger, an economic adviser to the German government, said in an interview today on Bloomberg Television. “They cannot end this day empty handed. I think they have to deliver something.”
Today’s meeting in Paris was announced last week as debt concerns rattled France, the second-largest euro economy after Germany. Doubts over France’s AAA credit rating hammered shares in the country’s banks and sent the risk premium of its government bonds above Germany’s to a euro-era record as the European Central Bank began buying Spanish and Italian debt.
“We’re moving toward a situation where it’s either euro bonds or bust,” said Nick Kounis, head of macroeconomic research at ABN Amro NV in Amsterdam. “We’re on the verge of extreme outcomes.”
The talks between Merkel and Sarkozy will focus on proposals to tighten enforcement of EU budget rules and expand coordination of national economies, according to French Finance Minister Francois Baroin.
Budget consolidation is paramount and joint bonds are not a topic for discussion, Merkel’s chief spokesman, Steffen Seibert, said yesterday, warning against expectations of a “big bang” from the meeting. “It is and remains a process,” he told reporters in Berlin.
Seibert declined to say whether short-selling will be discussed after France, Spain, Italy and Belgium banned the practice from Aug. 12 to stabilize markets, a move that prompted Germany to renew calls for a “far reaching” European ban on some forms of short-selling.
"The key thing that can be sent by Merkel and Sarkozy is that they are now beginning to consider these things very seriously,” Myles Bradshaw, a London-based money manager at Pacific Investment Management Co., said in an Aug. 12 interview with Maryam Nemazee on Bloomberg Television. “A signal from Merkel would signal greater comfort in the market with the idea that the Germans are actually changing.”
The German economy, Europe’s largest, almost stalled in the second quarter, growing 0.1 percent, as the debt crisis weighed on confidence, data released today showed. France, the second largest, didn’t grow in the same three months.
Unprecedented bailouts by governments totaling 365 billion euros ($522 billion) in emergency loans and ECB bond purchases have failed to stamp out the crisis. Faltering investor confidence may overcome the unwillingness of euro leaders to forge a U.S.-style fiscal union. Opponents don’t want to relinquish control of their own budgets or risk the higher borrowing costs that would result.
Last week’s market volatility prompted Sarkozy to return to Paris from his vacation for a day to meet top officials and outline an accelerated schedule to announce 2012 budget cuts. It forced Bank of France Governor Christian Noyer to issue a statement that banks were solid and well-capitalized.
As the week ended, Italy announced extra budget cuts that were demanded by the ECB, and Finance Minister Giulio Tremonti repeated his endorsement of euro bonds. That view is shared by counterparts including the head of the group of euro-area finance ministers, Luxembourg’s Jean-Claude Juncker.
A French official last month said there isn’t enough coordination among national economic policies to justify jointly sold bonds.
German Finance Minister Wolfgang Schaeuble told Der Spiegel in an interview published on Aug. 13 that he opposed unlimited aid, including joint borrowing. “There is no collectivization of debt or unlimited support,” he told the German magazine.
Merkel last directly addressed the topic in 2010, telling reporters in Berlin on Dec. 6 that EU treaties don’t “allow euro bonds, as far as we’re concerned.”
Since opposing any financial aid for Greece in early 2010, Germany has bowed to the requirements of the moment. Officials have since indicated the rejection of euro bonds isn’t ironclad.
Deputy Foreign Minister Werner Hoyer said in a July 20 interview Germany may not resist common bonds “forever” if the euro area were threatened. While euro bonds “are not the right solution for now,” the government is talking in terms of “the foreseeable future” rather than on a permanent basis, Peter Altmaier, deputy parliamentary leader of Merkel’s Christian Democrats, said on Deutschlandfunk radio yesterday.
Anton Boerner, head of Germany’s BGA exporters association, came out in favor of “euro bonds with a German stamp” yesterday. The main opposition Social Democrats and the Greens already back the measure, with Greens co-leader Juergen Trittin last week calling euro bonds the “only way” to end the crisis.
Merkel is examining whether euro bonds could help end the sovereign debt crisis, the Sueddeutsche Zeitung reported today, without quoting anyone. Germany’s biggest-selling Bild newspaper came out against euro bonds, saying in today’s edition that their introduction would be “explosive for our currency and the coalition in Berlin.”
The road to euro bonds runs through the German parliament, which may mean a long slog. Ruling coalition lawmakers last week rejected a further expansion of the 440 billion-euro rescue fund or introduction of joint bonds to staunch the debt crisis.
Merkel’s Free Democratic Party coalition partner will balk at any such measure, FDP lawmaker Frank Schaeffler told Bild. He suggested that any attempt to introduce euro bonds with the help of the opposition might break the coalition. For Merkel, “there’s no alternative majority,” he said.