Bundesbank Warns Greece as E.U. Leaders Meet

‘Taboos’ on agenda for meeting as crisis continues

Germany’s Bundesbank warned Greece on Wednesday that if it failed to carry through with reforms it had previously agreed to, it would jeopardize any further aid funds. The hard line came even as Chancellor Angela Merkel of Germany prepared to stand firm against a wave of opposition to her commitment to austerity, with “taboos” such as joint euro bonds on the table at a summit meeting of European leaders.

Reuters reported Wednesday that the Bundesbank’s monthly report talked tough about Greece, saying that the situation there was “extremely worrying” and that Athens would have to suffer the consequences of any refusal to adhere to previously agreed-upon measures. At the same time, however, the report said that should such a situation come to pass, the euro zone would be in for challenges that it termed “considerable but manageable.”

The report also took a shot at European leaders, warning them not to ease up the pressure on Greece in order for the struggling country to have continued access to funding. In part, it said, "A significant dilution of exiting agreements would damage confidence in all euro area agreements and treaties and strongly weaken incentives for national reform."

Saying that providing liquidity to Greece had resulted in “considerable risks” for the Eurosystem of central banks in the eurozone, the Bundesbank warned, “In light of the current situation, it should not significantly increase these risks." The report continued, "Instead, the parliaments and governments of the member states should decide on the manner in which any further financial assistance is provided and therefore whether the associated risks should be assumed."

The Bundesbank also took a stand against any stimulus for Germany, saying that growth fueled by construction and consumption would continue in the second quarter, and that manufacturing would "probably only make a comparatively small contribution."

It continued, "In light of all this, calls on German fiscal policymakers to loosen their fiscal policy stance in order to stimulate the economy appear inappropriate. Attempting to kick-start the economy in the short term and putting off consolidation efforts in the long term are not conducive to regaining lost confidence."

While that tough stance was echoed in Merkel’s resistance to joint euro bonds, according to the Financial Times, she will be hard pressed to resist calls from numerous countries at the Brussels summit on Wednesday when they are led by France’s new president, Francois Hollande, who has been a strong advocate for them. And Hollande is far from the loudest speaker about them.

According to a Bloomberg report, European Union President Herman Van Rompuy issued a plea in his invitation letter for the May meeting for “no taboos concerning the longer-term perspective.” Van Rompuy was quoted saying, “the perspective of moving toward a more integrated system would increase confidence in the euro.”

He also wrote that a discussion of the eurozone crisis would only come at the end of the summit, and warned that no action would likely be taken on the matter until another summit meeting is scheduled for the end of June.

Germany has already dismissed the notion of joint euro bonds, which could erode Berlin’s creditworthiness and boost its borrowing costs even as they eased funding restrictions for the eurozone’s weaker member states.

One senior German official was quoted saying, "There is no way of introducing them under the current [EU] treaties. Indeed, there is an explicit ban on them." He added that Germany would not change its mind about such bonds any time soon, saying, "That's a firm conviction which will not change in June."

Germany is joined in its opposition by Austria, Finland and the Netherlands, all with better financial standing than many of the countries supporting the bonds. “I won’t sacrifice the Austrian credit rating,” Finance Minister Maria Fekter of Austria was quoted saying on Tuesday. “I’m not willing to see Austria potentially pay double the interest rates we currently do.”

Still, there is powerful support for the bonds. Pier Carlo Padoan, chief economist for the Organization for Economic Cooperation and Development (OECD), was quoted saying, "We need to get on the path towards the issuance of euro bonds sooner rather than later."

The International Monetary Fund (IMF) appears to lean toward the bonds as well, although its head, Christine Lagarde, stopped short of saying so. In calling for more sharing of the load, she said in the report that "more needs to be done, particularly by way of fiscal liability sharing"—an apparent reference to joint euro bonds.

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