German Chancellor Angela Merkel was besieged by critics for letting the euro crisis smolder, with the leaders of Italy and the European Central Bank demanding bolder steps to stabilize the 17-nation economy.
Italian Prime Minister Mario Monti and ECB President Mario Draghi pushed Germany to give up its opposition to direct euro-area aid for struggling banks. Monti further antagonized Germany by urging a roadmap to common borrowing.
Calling himself a devotee of German-style budgetary rigor, Monti told a Brussels conference yesterday that Merkel’s vision of a stable economy “risks being undermined because of lack of promptness in setting up the necessary instruments to limit the contagion.”
Financial markets offered a snapshot of Europe’s stresses after more than two years of crisis, with the euro close to its weakest in two years against the dollar. German two-year note yields fell below zero today as investors paid for shelter from the market mayhem afflicting Italy and Spain.
Draghi told a European Parliament committee in Brussels that without more aggressive action by policy makers the euro “is being shown now to be unsustainable unless further steps are being undertaken.”
He said it wasn’t his job to make up for the failures of policy makers. “It’s not our duty, it’s not in our mandate” to “fill the vacuum left by the lack of action by national governments on the fiscal front,” on “the structural front, and on the governance front,” he said.
His comments yesterday came the day after the European Commission proposed European-financed bank recapitalizations and a timetable for euro bonds. Those ideas were rejected by Germany, Europe’s biggest economy and the chief underwriter of 386 billion euros ($477 billion) in aid offered since 2010.
Merkel, who hosts Russian President Vladimir Putin today, put some nuance into the German position yesterday. While promising “no taboos” in attacking the crisis, she floated a timeline of “five to 10 years” for fixing flaws in a currency shared by countries with divergent wealth and attitudes toward taxing and spending.
Merkel lost her chief crisis-fighting ally last month when French President Nicolas Sarkozy was defeated by Francois Hollande, a Socialist who challenged the pro-austerity doctrine and called for a more activist central bank.
Monti joined Hollande in cornering Merkel in a conference call this week with U.S. President Barack Obama, who has criticized Europe for failing to get to grips with the crisis. The four-way call focused on “developments in Europe,” the White House said in a statement.
Merkel’s international isolation goes along with a state of political siege at home after her party was routed in elections in Germany’s largest state. In office since 2005, she is one of only five euro-area leaders to hold on to power since the crisis broke out.
Monti, Draghi and Bank of Italy Governor Ignazio Visco prodded Germany to back the proposal by the Brussels-based commission, the EU’s executive branch, to allow the euro-area bailout fund to support banks directly instead of channelling the money via governments. The permanent fund, the European Stability Mechanism, is due to come on line in July.
“People are actually working on finding ways that the ESM could be used to recapitalize banks,” Draghi said. “The issue is not so much the use of ESM money to recapitalize banks but whether this could be done directly without having to go to governments.”
With creditor countries including Germany and Finland insisting they must be consulted before such funds are deployed, Draghi said there is a risk that “we have a big pot of money but nobody can touch it.”
Monti, a former economics professor who fought against Italy’s culture of spending and inflation in the 1980s and served for a decade on the commission in Brussels, said it is in Germany’s own interest to shed its crisis-fighting inhibitions.
“Maybe I’m too German” in economic and fiscal policy, Monti said. That credo and the imposition of budget cuts that will put Italy in structural surplus next year give the non-partisan Monti -- heading a technocratic government that will expire in 2013 -- leverage in dealing with Merkel.
Italy’s extra 10-year borrowing costs over German levels reached 470 basis points yesterday, the highest since January. Monti said Italy is being punished for mistakes made elsewhere - - and by prior Italian leaders that left him with debt of 123.5 percent of gross domestic product to work off.
“Countries that are at the core of the system and which have had the huge merit of instilling the culture of stability to the European Union in the first place, most notably Germany, should really reflect deeply but quickly,” Monti said via video link to the Brussels conference. “Europe should really accelerate the efforts, as the European Commission is doing, in order to limit the contagion.”