Berlin under fire as division emerges over euro bonds

GERMAN BANKS and financial analysts have criticised Berlin’s handling of the euro zone crisis, as government officials attempt to stifle discussion of proposed euro bonds.

Ahead of this week’s EU summit, German officials deny leaders will sound out the prospect of reducing borrowing costs by pooling debit issuance.

The discussion in Germany has been fuelled by finance minister Wolfgang Schäuble’s weekend musings on the prospect of closer political and economic union as a result of the euro zone crisis.

“In 10 years, we will have a structure that will better meet what one can describe as political union,” he told the Bild am Sonntag newspaper.

Euro bonds would only be acceptable to Germany, the minister has suggested, if national parliaments handed their budget and tax affairs to Brussels.

German chancellor Angela Merkel was described as “unEuropean” by Luxembourg for dismissing the euro bonds idea out of hand. Yesterday she called her finance minister into line.

Her spokesman Steffen Seibert said: “The chancellor is convinced that what’s necessary now is to act to defend a stable euro. Thoughts about what will be or won’t be in 20 years are not on the agenda.”

That left Mr Schäuble’s spokesman struggling to clarify what his minister had – and hadn’t – said.

“We’re talking about a perspective pointing to a route,” said finance ministry spokesman Martin Kreienbaum. Closer European integration was a “constant process” that would not happen overnight, he added.

Dr Merkel’s call to accentuate the euro zone’s present rather its future is understandable following her mauling last month for, critics say, spooking markets with a call for private investors being included in euro zone debt restructuring after 2013.

Not everyone in Berlin’s finance ministry is happy with their minister being silenced with, as one official put it, an order to “return to driving by sight” on EU reform.

German political observers say Dr Merkel and Mr Schäuble are singing from different euro zone hymn sheets with no coherent line emerging from Berlin.

“Dr Merkel is just worried about securing a permanent euro rescue mechanism for the time after 2013 while Mr Schäuble is thinking long-term about the direction of the EU,” said one senior political adviser to the government.

In Frankfurt, bankers agree with Berlin that euro bonds, in their current form, offer an unacceptable invitation for debt-addled southern European economies to keep borrowing, sending the bill to Germany.

“The government is right to reject euro bonds, [because] everyone has to be responsible for themselves . . . and reduce their own spending with austerity programmes like Ireland’s,” the German Banking Association said in a statement.

Behind the scenes, however, Frankfurt bankers seem to share the Schäuble view that looming reform offers a chance to remould the euro zone along German lines.

“Dr Merkel is very careful and doesn’t allow herself to be driven on by events, but the government urgently needs someone who understands the markets, who has sat at the trading table,” said one senior banker, who asked not to be named. “I don’t see that now.

“The markets don’t like mixed signals and mixed signals are something we could accuse the government of at the moment.”

German financial analysts say market expectations of this week’s summit are low. “The assistance for Ireland has taken care of short-term uncertainty out of the market but from mid-January we will need to know what direction things are going after 2013,” said Antje Praefcke, senior FX analyst with Commerzbank in Frankfurt.

“The German position on euro bonds could be interpreted as cautious interest politics, a tightrope walk between the market and politics. Berlin’s ‘no, but’ position is about seeing who holds what cards ahead of the summit.”