French clash with Germany over ECB role intensifies

 

FRANCE'S POSITION:FRANCE HAS ramped up pressure on Germany to drop its opposition to the European Central Bank playing a greater role in controlling the euro zone crisis, saying the bank will be “a significant element” of the solution.

It said Paris sees “more federalism” emerging in Europe and that treaty change is likely as part of the EU’s response to the crisis.

Making clear that France and Germany are at loggerheads over the role the ECB should play in calming the market turmoil, finance minister François Baroin said Berlin was blocking attempts to make the bank a lender of last resort.

“We are in favour of the intervention of all the European institutions, including the ECB, to achieve the best responses to the crisis,” he said. “Germany, for historical reasons, has closed the door to direct involvement of the ECB.”

Chancellor Angela Merkel last month rejected a French plan to give the euro zone rescue fund, the EFSF, the powers of a bank and allow it to access ECB funding. She argues that having the ECB lend to struggling states would breach EU rules, jeopardise the bank’s independence and give states a free pass to run up deficits. It could also cause inflation to spike.

In an interview with financial newspaper Les Echos yesterday, Mr Baroin argued that the US Federal Reserve and the central banks of England and Japan had intervened to shore up their economies without their independence being questioned. “But Germany has a history, a memory of inflation, of indebtedness… We respect German history and states must of course do their work, but we believe that the ECB is one response and probably a significant element in the response to the crisis,” he said.

Mr Baroin said France believed much closer convergence among European states would be another part of that response, and that treaty change was likely.

“If the question is ‘are we heading towards more federalism’, the answer is yes,” he said. “We have to move towards more convergence, with a likely change to the treaties.”

A French government spokeswoman later echoed Mr Baroin’s remarks on the ECB’s involvement. “The ECB’s role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures to ensure financial stability in Europe,” the spokeswoman said.

The recent market jitters have caused France’s cost of borrowing to rise amid concerns over its large deficit and exposure to Italian banks. Yesterday the gap, or spread, between the interest rate on 10-year French bonds and their German equivalents hit a euro-era peak of 195 basis points.

The spokeswoman said Paris believed such a wide spread was “not justified” as France had unveiled two austerity packages in the past three months and was sticking to commitments it had made to reduce its debt and budget deficits.

“We are expecting a slowdown, but not a recession,” Mr Baroin said. “We are doing everything to maintain our [triple-A] credit rating, to borrow more cheaply.”