Euro's big four agree growth boost, split on bonds

ROME: German Chancellor Angela Merkel
resisted pressure on Friday for common euro zone bonds or a more
flexible use of Europe's rescue funds but agreed with leaders of
France, Italy and Spain on a 130 billion euros ($156 billion) package
to revive growth.
After four-way talks in Rome's Renaissance Villa Madama, Italian Prime Minister Mario Monti
said the European Union should adopt pro-growth measures worth about 1
percent of the region's gross domestic product at a crucial summit next
week.
But the three others made no perceptible progress in
pushing Merkel, who leads Europe's most powerful economy and the main
contributor to its rescue funds, towards mutualising Europe's debts or
using existing bailout resources more flexibly.
"Growth can only
have solid roots if there is fiscal discipline, but fiscal discipline
can be maintained only if there is growth and job creation," Monti told
a joint news conference after talks that lasted just an hour and 40
minutes.
The measures, already in the works in Brussels, include increasing the European Investment Bank's
capital, redirecting unspent EU regional aid funds and launching
project bonds to co-finance major public investment programs. No new
steps were announced on Friday.
The four leaders did agree to
move ahead on creating a tax on financial transactions even though not
all EU members will be on board. About a dozen EU states support
setting up the so-called "Tobin tax", more than the nine required to go
ahead as a group within the EU, a French presidential source said.
Merkel made no mention, however, of any move towards mutualising past euro zone debt or new borrowing.
French President Francois Hollande voiced impatience with Berlin's reluctance, saying it should not take 10 years to create jointly underwritten euro bonds.
He said greater solidarity was needed among member states before they abandon more sovereignty to EU institutions.
"I
consider euro bonds to be an option ... but not in 10 years," Hollande
said in a direct challenge to Merkel. "There can be no transfer of
sovereignty if there is not an improvement in solidarity."
The
German position essentially amounts to the reverse. Merkel argues that
members of the 17-nation currency union must transfer control over
national budget and economic policies to Brussels before Germany would
consider common debt issuance.
"Liability and control belong
together," she said, citing as an example that EU treaties ruled out
letting euro zone rescue funds lend directly to Spanish banks because
only the Spanish state could enforce conditions on the banks.
The
contrasting comments left much work for diplomats to produce a
convincing blueprint for closer fiscal and banking union at a full EU
summit next Thursday and Friday, which Monti called a defining moment
in the crisis.
That plan is expected to include the first steps towards a banking union, starting by putting the European Central Bank in charge of supervising large cross-border euro zone banks.
Without
progress on bank sector integration or other financial stability
measures, France is not ready to commit to ratifying an EU budget
discipline pact agreed earlier this year, French diplomatic sources
said.
SPANISH BAILOUT?
Dangerously high Spanish borrowing costs eased a little on market hopes for policy initiatives at the Brussels summit.
The
European Central Bank took a supportive step on Friday, relaxing its
collateral rules to let financial institutions pledge a wider range of
assets in exchange for cash. The move helps counter the impact of
credit rating downgrades.
If it falls short, Madrid may be pushed closer to eventually needing a sovereign bailout.
Without
a convincing result, "there would be progressively greater speculative
attacks on individual countries, with harassment of the weaker
countries", Monti said in an interview with several European newspapers
ahead of the mini-summit.
"A large part of Europe would find
itself having to continue to put up with very high interest rates that
would then impact on the states and also indirectly on firms. This is
the direct opposite of what is needed for economic growth," he said.
The
technocratic Italian premier, who needs a success to shore up his
weakening domestic authority, sounded slightly more optimistic after
the talks, saying next week's summit should "put at ease the financial
markets' expectations", switching to English to add: "The euro is here
to stay and we all mean it."
Spanish Prime Minister Mariano Rajoy,
on the brink of requesting up to 100 billion euros in euro zone rescue
funds to recapitalize struggling banks, said the four had agreed "to
use any necessary mechanism to obtain financial stability in the euro
zone".
An audit released on Thursday found Spanish banks would
need up to 62 billion euros in extra capital to weather adverse
circumstances.
After a meeting of euro zone finance ministers
late on Thursday, IMF chief Christine Lagarde demanded rapid progress
on a number of other fronts, raising the heat on Merkel.
Lagarde
said a banking union was a top priority, alongside fiscal union and the
principle of mutualising debt. Germany refuses to countenance common
bond issuance and will not soften until economic union is complete. It
is also opposed to the early introduction of a bloc-wide bank deposit
guarantee scheme.
HIGH STAKES FOR MONTI
While Spain's
needs are most pressing - its medium term borrowing costs hit a euro
era high at auction on Thursday - the political stakes may be higher
for Italy's Monti.
With his popularity sinking, the parties that
back Monti in parliament are increasingly reluctant to support his
reform proposals at home, but demand he get results in the European
arena to ease the pressure on Italy's recession-bound economy.
"Monti
knows he has to get his ducks in a row on the European side so he can
tell the parties that he's sorted that part out, and now it's their
turn to help sort out Italy," said James Walston, politics professor at
Rome's American University.
Though hugely popular when he came
to office in November, Monti's approval rating has halved as tax hikes
and pension cuts exacerbated an already severe recession, and his labor
reform estranged both unions and the business establishment.
But
for the markets, Monti remains the man most likely to tackle Italy's
debt mountain and uncompetitiveness. If he comes under serious threat,
Italy could quickly supplant Spain as the euro zone's main flashpoint.
Monti's
hand was weakened by comments on Wednesday by his predecessor, Silvio
Berlusconi, who said the prospect of Italy quitting the euro was "not
blasphemy" and that he failed to understand why it would hurt Italy's
economy.
Berlusconi's People of Freedom party is one of the two main groups that guarantee Monti a majority in parliament.
Monti
proposed on the sidelines of this week's G20 summit using the euro
zone's rescue funds to buy the bonds of Spain and Italy to bring down
their borrowing costs.
Hollande said after Friday's talks he
supported the Italian idea. But Merkel has played down the notion,
which investors said might be counter-productive by quickly burning
through scarce rescue capital, unless the European Central Bank stepped
in decisively in support.
Other proposals from Monti, such as
stripping some forms of public investment from budget deficit
calculations, or commonly issued euro zone bonds, are also broadly
supported by France and Spain but opposed by Germany, at least for now.
- Reuters