Chancellor Angela Merkel of Germany was in a tight spot as fellow eurozone leaders turned up the heat on the issue of joint debt for the bloc—something she supports at home in Germany but has resisted in Europe.
Billionaire investor George Soros upped the ante, calling upon European leaders to start a fund for the purchase of Spanish and Italian bonds lest a planned summit meeting later this week fail to provide a solution to the crisis. And Spain formally asked for aid, a move that was expected after an earlier indication that the country would take such an action.
Bloomberg reported Monday that at a four-way summit meeting in Rome on Friday among the leaders of Germany, France, Italy and Spain, Merkel (left) found herself on one side of the table with the other three leaders united against her on the matter of increasing flexibility in how the eurozone’s rescue funds are used.
President Francois Hollande of France, Prime Minister Mario Monti of Italy and Prime Minister Mariano Rajoy of Spain all pressed Merkel to give way on such tactics as allowing banks to be directly recapitalized without funding having to flow through governments. Taxpayers in Germany could not support such a plan, she said, because they would have no oversight into how the funds were used.
“You would have a huge problem here,” she said in the report, adding that as chancellor she only had powers over how German banks would use such funding—with no influence on the banks of other countries in the eurozone.
Last week she also nixed a proposal by Monti for either the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM) to buy the bonds of Spain and Italy and thus backstop the crisis.
She has also been firmly opposed to any immediate move for the eurozone to issue joint bonds, despite Hollande’s support for such a plan; he had called joint bonds “a useful instrument for Europe.” However, at home her party backed down on opposition to a similar plan for the German government to underwrite debt from its own states.
Tighter EU rules on budgets brought Germany’s 16 states to pressure the central government for a means of shared debt sales. The government agreed Monday to a plan that will result in Germany's first shared debt sale in 2013. However, Finance Minister Wolfgang Schaeuble said in the report that just because an agreement was reached within Germany, that doesn’t mean the country is ready to take on liability for the whole eurozone.
He was quoted saying that as long as individual eurozone governments make their own budgets, such joint sales “don’t make sense.” He added, “As long as the national states make the decisions, they have to be liable. If you can spend money on my tab, you won’t be thrifty.”
Still, Soros (left) spoke out over the weekend and said that if European leaders failed to come to agreement on drastic action at the summit planned for the end of the week, the euro could collapse. Political leaders are running out of time, according to Soros, and they need to start a fund to buy Spanish and Italian debt.
“There is a disagreement on the fiscal side,” Soros said in a weekend interview. “Unless that is resolved in the next three days, then I am afraid the summit could turn out to be a fiasco. That could actually be fatal.”
Soros also criticized Merkel’s determination to oppose joint debt. “Merkel has emerged as a strong leader,” he said in the report. “Unfortunately, she has been leading Europe in the wrong direction.”
He also had criticism of Germany’s treatment of Greece, saying, “It is very hard to see how Greece can actually meet the conditions that have been set. The Germans are absolutely determined not to modify those conditions. One has to now calculate on Greece being forced out of the euro.”
Optimism was falling in advance of the summit meeting to be held at the end of the week as Spain officially asked for the aid that it indicated it would request earlier in the month. The June 9 informal request will be replaced by July 9 with an official signed memorandum of understanding, according to a Reuters report. In a letter to Eurogroup chairman Jean-Claude Juncker, Economy Minister Luis de Guindos of Spain asked for up to 100 billion euros ($125 billion), saying that the final total would be determined later.
Some analysts believe that the bailout, which is to be directed solely at Spain’s financial sector, is only the preliminary move to an all-out rescue of the country. Should that happen, pressure will increase on the eurozone and investor attention will turn to Italy, whose borrowing costs have been rising along with Spain’s—although not to the same degree.
A preliminary document prepared in advance of the meeting by EU officials calls for gradual introduction of a banking union, despite Germany’s opposition to many proposed means of closer integration. The document states that the European Central Bank will be granted supervisory power and that a deposit guarantee strategy will be developed that is based on the pooling of national systems. There will also be a bank resolution fund that will be financed by levy.