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% 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 aid funds and launching project bonds to co-finance major public investment programmes. No new steps were announced yesterday.
Merkel made no mention of any move towards mutualising past eurozone 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 eurozone 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 eurozone banks.
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 yesterday, 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.
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 €100bn in eurozone rescue funds to re-capitalise struggling banks, said the four had agreed “to use any necessary mechanism to obtain financial stability in the eurozone”.
An audit released on Thursday found Spanish banks would need up to €62bn in extra capital to weather adverse circumstances.
After a meeting of eurozone 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.
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.
Monti proposed on the sidelines of this week’s G20 summit using the eurozone’s rescue funds to buy the bonds of Spain and Italy to bring down their borrowing costs.
Hollande said after yesterday’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 eurozone bonds, are also broadly supported by France and Spain but opposed by Germany.from gulf times.