German Chancellor Angela Merkel shut the door to joint euro-area bonds as a means of lowering Spain’s borrowing costs, saying they are the “wrong way” to achieve the greater European integration needed to stem the debt crisis.
Speaking three hours after Spanish Prime Minister Mariano Rajoy made a plea for help from tomorrow’s European summit, Merkel said that euro bonds, euro bills and debt redemption funds are unconstitutional in Germany and economically “wrong and counterproductive.”
“I fear that at the summit there will be much too much talk about mutual liability and far too little about improved oversight and structural measures,” Merkel told lower-house lawmakers in Berlin today. “Oversight and liability have to go hand in hand. There can only be joint liability when adequate oversight is ensured.”
Merkel is under growing pressure from her European and global counterparts to soften her opposition to debt sharing in the euro area and do more to cut borrowing costs for Spain and Italy. Rajoy, outlining his goals for the two-day European Union summit beginning in Brussels tomorrow, said that Spain can’t go on financing itself at current borrowing rates for long.
“The most important thing today is being able to finance ourselves in the markets, that’s the main issue,” Rajoy said in Parliament in Madrid. “And on that point Spain, Italy and other countries are going to push for reasonable decisions to be made,” using the “available instruments.”
Spanish 10-year bond yields were little changed at 6.86 percent after jumping 24 basis points yesterday, nudging the 7 percent level that forced Greece, Ireland and Portugal to call for sovereign bailouts. Equivalent German bonds yielded about 1.54 percent.
German Finance Minister Wolfgang Schaeuble, speaking at a separate event in Berlin, said his country’s borrowing costs are “unnaturally” low and shouldn’t continue. “It’s more an expression of anxiety than stability” in financial markets, he told reporters.
EU leaders meeting in Brussels are due to discuss a plan for closer European integration spearheaded by EU President Herman Van Rompuy that centers on common banking supervision and deposit insurance, along with a “criteria-based and phased” move toward joint debt issuance. The blueprint also suggests that the EU could impose upper limits on annual budgets and debt levels of nations that use the euro.
While Merkel said that she welcomed the Van Rompuy proposals and agreed with his four building blocks toward integration, she rebuffed any notion Germany shoulder the cost.
“I decisively reject the presumption in this report that the principle of collectivization takes priority,” she said. Rather, individual countries must “keep to agreed rules” and raise their competitiveness through structural reforms, using the best in Europe as the standard “rather than mediocrity.”
“The sovereign debt crisis shows us daily that deficiencies in one euro-zone country can cause difficulties in the entire euro zone,” Merkel told lawmakers. “It also shows us that national answers aren’t enough to secure the euro area’s stability.”
Merkel is increasingly isolated as Rajoy, French President Francois Hollande and Italian Prime Minister Mario Monti unite to push for quicker action to ease the crisis that emerged in Greece in late 2009. The three leaders back the creation of euro bonds and are pushing for measures to spur growth.
Merkel is meeting in Paris today with Hollande, and will travel to Rome to meet with Monti on July 4.
“The situation is serious and we have an obligation to build a strong and stable Europe for the future,” Merkel said as she arrived for a dinner with Hollande. “We need more Europe, a Europe that functions, a Europe where members help each other.”
Hollande said the euro zone “must go as far on integration as necessary and as far on solidarity as possible.”
Both said they expected a package of growth measures, many of which such as greater use of structural funds and lending for infrastructure projects were first suggested last year, to be approved tomorrow.
“The key negotiators, including the German chancellor, do not really understand the timeframe we’re working under,” Niall Ferguson, a professor of economic history at Harvard University, said at a conference in London. “The timeframe for financial crises is days. The timeframe for structural reforms is years.”
Spain formally requested a European bailout for its banks on June 25 and discussions continue as to what conditions lenders will have to meet and whether the loan of as much as 100 billion euros ($125 billion) would take precedence over other debts in the event of default.
Rajoy said he will fight so that rescue loans “aren’t superior to the rights of other creditors of public debt.” Germany, Finland and the Netherlands want official loans to Spain to be repaid first in the event of default, undermining the interests of existing bondholders, two European officials said this week.
Rajoy also backs a so-called banking union, which he says includes joint deposit-guarantee funds and would allow Europe’s rescue funds to recapitalize banks directly without going via the government. German officials have rejected those proposals.
“It all hinges on her,” said Ferguson of Merkel. “She has to realize the cost of disintegration to Germany would be mind-blowing.” Whatever happens, “Germany pays,” he said. “Do they pay through massive defaults or fiscal transfers?”