Merkel steps up opposition to eurobonds

Mon, Jun 4, 2012, 01:00

GERMAN CHANCELLOR Angela Merkel has delivered her most strident rejection yet of eurobonds, saying she would agree to jointly issued euro zone debt “under no circumstances”.

The remarks, to political allies in Berlin, came as European Parliament president Martin Schulz described eurobonds as an effective way to “water down” tensions in the bloc.

Meanwhile, Madrid is reportedly resisting efforts by Germany to accept a euro zone bailout, with Spanish prime minister Mariano Rajoy denying that rising borrowing costs mean his country is “on the edge of a precipice”.

Berlin no longer believes Spain can solve its bank crisis on its own and wants it to accept financial aid from the temporary bailout fund – the European Financial Stability Facility.

German finance minister Wolfgang Schäuble believes Spanish banks may require up to €90 billion in funding and told his Spanish colleague, Luis de Guindos, last week that this was impossible to fund without a bailout, according to Der Spiegel.

The Spanish minister dismissed the idea out of hand: Madrid would await the results of an external analysis of Spanish banks’ capital requirements but was confident it could solve the issue without external assistance.

Interest rates on Spanish sovereign debt reached 6.7 per cent last week, close to the mark where other countries stood before accepting bailouts.

Ahead of what is likely to be another difficult week on financial markets, Mr Rajoy repeated his call for a centralised fund to directly recapitalise banks. He dismissed as “irrational” market fears over Spain’s banking sector, saying Spain would “emerge from the storm under its own efforts and with the support of our European partners”.

While Berlin pushes Madrid on a bailout, it continues to reject pressure from elsewhere in the EU on eurobonds.

Mr Schulz, a German MEP in the Socialist camp, told RTÉ Radio 1’s This Week programme it was “unhealthy” for the European Central Bank to borrow money from markets and lend on to countries in need at 7 per cent.

Such an “abuse” of the financial markets needed to be brought to an end, he said, calling for a rapid introduction of eurobonds.

While many EU countries, including Ireland, support eurobonds as a way to shore up the common currency, Germany argues that mutualising European debt would revive bad habits from the euro’s early days. Then, Berlin argues, some countries indulged in excessive borrowing thanks to low interest rates created by markets incorrectly viewing the currency union as a homogenous fiscal bloc.

“The freedom created by this situation wasn’t exploited to improve long-term competitiveness and instead the time was used to spend too much money in consumption and too little time in tackling reforms,” said Dr Merkel in Berlin on Saturday.

Germany sees higher interest rates on some euro zone members as market-induced pressure for overdue reforms.

Eurobonds, Dr Merkel argues, would only prematurely reduce the pressure before necessary reforms are completed.

With an eye on pressure from her critics within the EU, however, Dr Merkel told party officials in Berlin that she welcomed ongoing pay deals as way of increasing domestic demand.

Berlin’s critics, in Europe and in Washington, say years of wage restraint in Germany contributed to weak domestic demand, euro zone distortions and a high German trade surplus.

Berlin has always denied this, saying the problem lay with others’ uncompetitive economies – but that line has softened of late.

“Good budgetary policy and good demand politics have to be combined,” said Dr Merkel.

But in case anyone thought she was going soft on debt – either through eurobonds or debt-financed growth measures – she added: “It is wrong to react to the debt crisis with new debt.”