German Chancellor Angela Merkel shut the door to joint euro-areabonds as a means of lowering Spain's borrowing costs, saying theyare the “wrong way” to achieve the greater European integrationneeded to stem the debt crisis.

Speaking three hours after Spanish Prime Minister Mariano Rajoymade a plea for a summit of European leaders to use all availabletools to help Spain service its debt, Merkel said euro bonds, eurobills and debt redemption funds are unconstitutional in Germany andeconomically “wrong and counterproductive.”

“I fear that at the summit there will be much too much talkabout mutual liability and far too little about improved oversightand structural measures,” Merkel told lower-house lawmakers inBerlin today. “Oversight and liability have to go hand in hand.There can only be joint liability when adequate oversight isensured.”

Merkel is under growing pressure from her European and globalcounterparts to soften her opposition to debt sharing in the euroarea and do more now to cut borrowing costs for Spain and Italy.Rajoy, outlining his own goals for the June 28-29 European Unionsummit in Brussels, said that Spain can't go on financing itself atcurrent borrowing rates for long.

“The most important thing today is being able to financeourselves in the markets, that's the main issue,” Rajoy said inParliament in Madrid. “And on that point Spain, Italy and othercountries are going to push for reasonable decisions to be made” atthe summit using the “available instruments.”

Spanish 10-year bond yields were little changed at 6.86 percentafter jumping 24 basis points yesterday. Equivalent German bondsyielded about 1.55 percent.

European stocks rebounded from a four-day retreat, with theStoxx Europe 600 Index climbing 0.5 percent as of 1:29 p.m. inBerlin. The euro was little changed at $1.2488.

EU leaders will discuss a plan for closer European integrationspearheaded by EU President Herman Van Rompuy that centers oncommon banking supervision and deposit insurance along with a“criteria-based and phased” move toward joint debt issuance. Italso suggests that the EU could impose upper limits on annualbudgets and debt levels of nations that use the euro.

While Merkel said that she welcomed the Van Rompuy proposals andagreed with his four building blocks toward integration, sherebuffed any notion Germany shoulder the cost.

“I decisively reject the presumption in this report that theprinciple of collectivization takes priority,” she said. Rather,individual countries must “keep to agreed rules” and raise theircompetitiveness through structural reforms, using the best inEurope as the standard “rather than mediocrity.”

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“The sovereign debt crisis shows us daily that deficiencies inone euro-zone country can cause difficulties in the entire eurozone,” Merkel told the lower house, or Bundestag. “It also shows usthat national answers aren't enough to secure the euro area'sstability.”

Merkel is increasingly isolated as Rajoy, French PresidentFrancois Hollande and Italian Prime Minister Mario Monti unite topush for quicker action to ease the sovereign debt crisis thatemerged in Greece in late 2009. The three leaders back the creationof joint euro-region bonds, which Merkel opposes, and are pushingfor measures to spur growth. Merkel is due in Paris later today fortalks with Hollande, and will travel to Rome to meet with Monti onJuly 4.

“The key negotiators, including the German chancellor, do notreally understand the timeframe we're working under,” NiallFerguson, a professor of economic history at Harvard University,said at a conference in London today. “The timeframe for financialcrises is days. The timeframe for structural reforms is years.”

Spain formally requested a European bailout for its banks onJune 25 and discussions continue as to what conditions lenders willhave to meet and whether the loan of as much as 100 billion euros($125 billion) would take precedence over other debts in the eventof default.

Rajoy said he will fight so that European rescue loans “aren'tsuperior to the rights of other creditors of public debt.” Germany,Finland and the Netherlands want official loans to Spain to berepaid first in the event of default, undermining the interests ofexisting bondholders, two European officials said this week.

Rajoy also backs a so-called banking union, which he saysincludes joint deposit-guarantee funds and would allow the Europeanrescue funds to recapitalize banks directly without going throughthe government. German officials have also rejected thoseproposals.

“It all hinges on her,” said Ferguson of Merkel. “She has torealize the cost of disintegration to Germany would bemindblowing.” Whatever happens, “Germany pays,” he said. “Do theypay through massive defaults or fiscal transfers?”

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