German Chancellor Angela Merkel rejected French calls to deploy the European Central Bank as a crisis backstop, defying global leaders and investors calling for more urgent action to halt the turmoil.
As the crisis sent borrowing costs in core economies outside Germany to euro-era records, Merkel listed using the ECB as lender of last resort alongside joint euro-area bonds and a “snappy debt cut” as proposals that won’t work.
“I’m convinced that none of these approaches, if applied right now, would bring about a solution of this crisis,” Merkel said in a speech in Berlin today. “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.”
Merkel’s comments underscore German reluctance to assume more liability for taming the debt crisis even as it roils France, the euro region’s second-largest economy, and threatens to trigger a global recession. While President Barack Obama renewed calls for Europe to act, Merkel said “political action” to tighten budget rules is needed to stem the turmoil.
Stocks worldwide fell for a fourth day, the longest stretch of losses in two months, as Europe’s crisis festered. The yield on 10-year Spanish bonds rose as much as 37 basis points to 6.78 percent, a euro-era high, while the premium France pays over Germany to borrow for 10 years narrowed to 176 basis points after reaching a record 204 basis points.
The euro gained versus the dollar as the ECB was said to buy Italian government bonds, reaching $1.3504 at 5:20 p.m. in Frankfurt after falling to its lowest level since Oct. 10 earlier today.
‘Spreads Like Fear’
“Nothing spreads like fear,” said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London. “If the European Central Bank does not intervene forcefully to stop the rot, the panic could spread even further and eventually put the very existence of the euro and the ECB at risk.”
French Finance Minister Francois Baroin renewed a clash with Germany over using the ECB as a backstop, saying in a speech in Paris late yesterday that central bank support for Europe’s rescue fund is the best way to counter the crisis.
The Frankfurt-based ECB has also resisted calls to provide more support. Mario Draghi, the Italian who took over as president of the central bank this month, said Nov. 3 that backstopping government borrowing lies outside the ECB’s remit.
Resist Printing Money
Two bouts of hyperinflation last century helped give Germans a “genetic code” that makes them resist “printing more money,” Economy Minister Philipp Roesler told the conference. “You can’t make the mistake of giving in to this pressure. You’ll never get out of it, and that would be the end.”
The clash is intensifying as France, the second-biggest backer of the European Financial Stability Facility after Germany, is dragged more deeply into the crisis that began more than two years ago in Greece and in the past week led to the ousting of Italy’s Silvio Berlusconi.
The spread between French and German 10-year yields widened as France sold 6.98 billion euros ($9.44 billion) of notes. Spanish bonds sank, driving 10-year yields to the highest since the euro’s debut in 1999.
Speaking in Soria, Spain, today, Spanish Prime Minister Jose Luis Rodriguez Zapatero called on the European Commission and ECB to act “immediately” to stem the crisis.
Bond Yields Rise
The yields on bonds of countries from Portugal to Finland, the Netherlands to Austria rose relative to Germany amid mounting concern the debt crisis is spreading.
Merkel, in her speech, said that Europe must flesh out the details on leveraging the EFSF rescue fund, while pressing for European Union treaty changes to enforce budget control and reassure markets over the medium term.
She reached out to the U.K. on the eve of Prime Minister David Cameron’s visit to Berlin tomorrow, praising his effort to cut government spending and saying that “we want a Europe with Great Britain” that doesn’t exclude any member country from the euro area.
She called for countries to drop national objections and agree on changes to EU treaties to tighten oversight over national budgets, saying amendments could be “very limited” and possibly apply only to euro countries. Treaty change is “indispensable to persuade markets that we will continue on our path together,” she said.
The market rout comes three weeks after European leaders agreed at an all-night summit to recapitalize banks and force bondholders to take a 50 percent writedown on Greek debt in what was billed as a comprehensive solution to the crisis.
If the package fails, the ECB will have to step in or the euro region will break up, Beatrice Weder di Mauro, a member of Merkel’s council of economic advisers, said today.
“Everything depends on Germany,” she said at the Berlin conference. “Which way we head next year and whether things quiet down will depend on German policy makers.”
French President Nicolas Sarkozy had backed down over the role the ECB should play in fire-fighting, acknowledging Germany’s inter-war experience of inflation, to help obtain the Oct. 27 accord among European leaders.
Citigroup Chief Economist Willem Buiter suggested that Germany should overcome its fear of inflation. The ECB is “the only remaining show in town,” Buiter, a former member of the Bank of England’s monetary policy committee, said on Bloomberg Television’s “Surveillance Midday” with Tom Keene yesterday. “We’re not asking for Weimar.”