June 27, 2012

Discord Rules Before EU Summit

Germany increasingly isolated as other nations press for unity

It looked more and more as if Germany was standing almost alone on one side of a great political chasm and most of the rest of the European Union was standing on the other in the runup to the 20th summit meeting of EU leaders since the beginning of the eurozone debt crisis. The division, ironically, is over unity—closer financial ties among the nations of the eurozone.

Reuters reported Wednesday that an attempt late Tuesday to soothe ruffled feathers among the so-called Big Four—Germany, France, Spain and Italy—was so unproductive that nothing was said about its results.

Chancellor Angela Merkel of GermanyThat meeting of the four countries’ finance ministers came in the wake of a dust-up on Friday, when at a news conference in Rome, President Francois Hollande of France said that European countries must strengthen their ties to one another before authority over their budgets can be turned over to a central control, and Chancellor Angela Merkel of Germany (left) said that without control over other countries' budgets she would not agree to any additional debt. Usually leaders are more cautious about exposing rifts, but as the summit meeting approaches, tempers are flaring.

So far Merkel and the two other AAA-rated countries of the bloc, Finland and the Netherlands, are resisting any attempt at joint financing—something called for by Hollande and others in the eurozone—without an accompanying authority over the budgets of the countries seeking funds.

Prime Minister Mario Monti of Italy is advocating use of the eurozone’s rescue funds to buy up sovereign debt of peripheral countries so that yields would not continue to skyrocket above the yields of better-rated governments. Prime Minister Mariano Rajoy of Spain is pushing for that or for a resumption by the European Central Bank (ECB) of its own bond-buying program as Spain struggles to contain its own debt situation by simply channeling funds directly to its financial sector in the hope of avoiding a full-scale sovereign bailout.

Merkel has been standing firm against any such measures, and on Tuesday was reported to have said at a closed-door meeting of lawmakers in Berlin that she would continue to oppose them.

"I don't see total debt liability as long as I live," she was quoted saying, after on Monday she had called the concept of joint eurozone bonds "economically wrong and counterproductive." She also said before the Bundestag that there were no easy answers to the debt crisis, and was quoted saying, "It is imperative that we don't promise things that we cannot deliver and that we implement what we have agreed. Joint liability can only happen when sufficient controls are in place."

The degree of disagreement among EU countries is casting a pall over markets, as many investors are apparently sitting it out to see what will happen over the next few days. While Monti told the Italian parliament that he is prepared to negotiate all weekend if necessary to come up with a means to soothe markets, rather than simply accept summit conclusions, analysts were not sanguine about the quality of possible results.

Neil Mellor, currency analyst at Bank of New York Mellon, was quoted saying, "People are waiting for the inevitable—which is that policymakers will probably fail to do what is necessary."

Still, leaders are continuing to talk in advance of the summit gathering. Economy Minister Luis de Guindos of Spain said Wednesday that he had already spoken with the finance ministers of Germany, France and Italy and that they planned more such discussions.

The debt crisis is having additional effects for eurozone nations already struggling with debt woes. Cyprus, which asked for its own bailout on Monday, is due to take over the 6-month rotating presidency of the EU in less than a week.

However, after it requested financial assistance, the ECB has said that it will no longer accept Nicosia’s bonds as collateral. Cyprus saw its credit rating downgraded by all accepted rating agencies into the speculative category. As a result, an ECB official in Frankfurt said, Cypriot government securities no longer satisfy the creditworthiness requirement for the presidency. Also, its banks cannot offer Cyprus government bonds to secure cash loans from the ECB.

With so much riding on the summit, and so much dissention in the ranks, it is perhaps ironic that Charles Dallara, managing director of the Institute of International Finance (IIF), said that it was possibly the most important such meeting since the EU began.

"Not only the future of the euro [but also] the future of Europe is at stake,” Dallara was quoted saying in a De Zeit interview. “[The summit] is perhaps the most important since the founding of the European Union. This is about winning back the confidence of long-term oriented investors such as pension funds and insurance companies—and I fear that they will be convinced only by comprehensive solutions."

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