Sarkozy urges Berlin to extend remit of ECB


TENSIONS BETWEEN France and Germany over the debt crisis grew sharper yesterday when Paris publicly challenged Berlin to accept more European Central Bank involvement and radical changes to the euro zone rescue fund.

As the gap between France’s cost of borrowing and Germany’s stretched to levels not seen in over 20 years, drawing Paris deeper into the crisis, French finance minister François Baroin insisted that the ECB’s firepower was required to stop the crisis spreading further. He revived the idea – rejected by Berlin – of turning the euro zone rescue fund, the European Financial Stability Facility, into a bank that could then open a line of funding from the ECB.

“The position of France . . . is that the way to prevent contagion is for the EFSF to have a banking licence,” he said. “We want the fund to have the characteristics of a bank, but you know about Germany’s reservations.”

Germany has rebuffed calls from France and other countries for the ECB’s huge resources to be deployed in calming the market. Berlin argues this would cause inflation to spike, remove an incentive for countries to cut their deficits and breach EU rules. Chancellor Angela Merkel held her stance yesterday. “If politicians think the ECB can solve the euro crisis, then they are mistaken,” she said. “Even if the ECB assumes a role as lender of last resort, it would not solve the crisis.”

France’s decision to publicly campaign for a shift in Germany’s position marks an escalation in the battle of wills. At a meeting with deputies from his UMP party, according to leaked accounts, President Nicolas Sarkozy said the euro would not survive unless the ECB decisively entered the fray.

Mr Sarkozy has spoken to Dr Merkel twice in recent days. Last night, after a three-way conference call with new Italian prime minister Mario Monti, they issued a joint statement saying France, Germany and Italy would “assume all their responsibilities so as to ensure the stability, prosperity and strength of the whole of the euro zone”.

Taoiseach Enda Kenny endorsed greater ECB involvement in tackling the crisis during a visit to Berlin this week, while Spanish prime minister José Luis Rodriguez Zapatero, having seen his country’s 10-year bond yields surge to a dangerously high level of 6.78 per cent, called on the European Commission and ECB to act “immediately”.

Stocks worldwide fell for a fourth consecutive day yesterday, amid clear signs the turmoil was encroaching further into core European economies. The premium France pays over Germany to borrow for 10 years reached a record 204 basis points before narrowing to 176. When the crisis began, France and Germany had the same rate, but concerns over France’s large debts and budget deficit have left it vulnerable.

France now has to pay over twice as much as Germany to borrow for 10 years, even though both carry triple-A credit rating. In the French senate, Mr Baroin played down concerns over the country’s position, saying conditions were “satisfactory” and the rates were still “favourable”.

The yields on bonds of countries from Portugal to Finland, the Netherlands to Austria also rose relative to Germany yesterday.

As the search continues for strategies to deal with the crisis, Reuters reported that euro zone and International Monetary Fund officials had discussed the idea of the ECB lending to the IMF to provide the fund with resources to bail out even the biggest states. EU law bans the ECB from financing state borrowing, but the reports suggested the IMF idea had been floated to get the ECB involved in tackling the crisis without endangering its independence.