German Chancellor Angela Merkel again ruled out joint euro-area borrowing and an expanded role for the European Central Bank in fighting the debt crisis.
Euro bonds are “not needed and not appropriate,” Merkel said today at a press conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in Strasbourg, France. She said euro bonds would “level the difference” in euro-region interest rates. “It would be a completely wrong signal to ignore those diverging interest rates because they’re an indicator of where work still needs to be done.”
Merkel, the leader of Europe’s biggest economy, has so far backed a focus on debt reduction and closer economic coordination, calling for a revision of European Union treaties, a move that threatens to bog down in a multiyear negotiation, as core euro economies risk succumbing to the contagion that began in Greece in 2009.
German analysts, newspaper editorials and opposition politicians stepped up calls for Merkel to shift from an incremental approach after the government sold a fraction of the bonds it auctioned yesterday.
“As the crisis deepens with yesterday’s bond auction, the veil has been torn off Merkel’s policy of muddling through,” Sebastian Dullien, a senior fellow at the European Council on Foreign Relations in Berlin, said in a telephone interview. “It’s only got us closer to the end-game, either the breakup of the euro or euro bonds. The strategy has failed.”
“The flop shows that bunds are losing their sex-appeal as an extremely secure investment,” Germany’s Handelsblatt business newspaper said in a commentary today. “This shows the crisis has reached the entire euro-zone core. France, Finland, the Netherlands and Austria have to pay more interest for their bonds than just a few months ago.”
German bunds fell a second day. The 10-year bund yield rose as much as 12 basis points, or 0.12 percentage point, to 2.26 percent, the highest since Oct. 28, and was at 2.19 percent at 12:55 p.m. London time. Bids at yesterday’s auction of 10-year securities amounted to 3.889 billion euros ($5.2 billion), out of a maximum target for the sale of 6 billion euros.
Handelsblatt said the shortfall was a “wake-up call” for Merkel’s government, which opposes both issuing bonds for the entire 17-member euro region and allowing the ECB to buy unlimited amounts of euro-nation bonds.
The German government stood by its rejection of any common bonds for the euro bloc following a report in Bild newspaper that Merkel’s coalition is concerned it may have to agree to euro bonds under certain conditions. The newspaper didn’t say where it got the information.
“We say ‘no’ to euro bonds,” Economy Minister Philipp Roesler, who is also vice chancellor, said today in parliament in Berlin. “A transfer union would be wrong because it would mean German taxpayers pick up the costs. Euro bonds are wrong because they would mean a rise in interest rates for Germany.”
That contrasted with Handelsblatt’s view. “The ECB remains the only investor that can keep down the interest rates of bonds from euro states in the short-term,” Handelsblatt said. “In the long-term, there’s no getting around the necessity of creating fiscal union with at least partial euro bonds.”
The Frankfurter Allgemeine Zeitung newspaper said that while the low demand for German bunds was “no reason to panic” it shows that “around 2 percent interest for investors in these uncertain times is simply not enough.”
‘Moment of Truth’
“Pressure is growing on Merkel,” said Die Welt newspaper. “Up until now she managed to steer the nation through the crisis so that the people didn’t really notice the turbulence.”
Merkel now faces a “moment of truth” in the crisis as her opposition to ECB bond purchases and euro bonds “is being challenged,” Die Welt said.
German opposition parties ratcheted up calls for euro bonds. Frank-Walter Steinmeier, parliamentary leader of the Social Democratic Party in parliament, said on Nov. 21 that his party wants euro bonds as part of a solution to the crisis.
“A model using euro bonds that links European bonds to a reform program is the better alternative,” Juergen Trittin, a co-leader of the opposition Greens party, said in an N24 television interview today.
In Paris, the French government underlined calls for giving the ECB a bigger role in fighting the crisis.
“What’s not working is confidence and that’s what we must restore,” French Foreign Minister Alain Juppe said today in an interview on France Inter radio. “I hope that reflection will move forward that the ECB should have an essential role to restore confidence.”