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German and Italian Leaders Differ Over Euro Plans German and Italian Leaders at Odds Over Euro Plans
(about 3 hours later)
BERLIN — The leaders of Germany and Italy sought Wednesday to present a united front in the struggle against Europe’s sovereign debt crisis, but could not hide a division over how best to help the euro zone’s weaker economies. BERLIN — Angela Merkel, the German chancellor, on Wednesday praised the progress that Italy’s prime minister, Mario Monti, has made in revamping his country’s economy. But she also indicated there were limits to how much financial risk Germany was willing to bear in helping out its euro zone allies.
While Chancellor Angela Merkel of Germany praised Prime Minister Mario Monti’s efforts to implement change in Italy, she also firmly rejected the possibility of issuing a banking license to Europe’s permanent bailout fund, the European Stability Mechanism, a move that would allow it to draw on financing from the European Central Bank. After a two-hour meeting with Mr. Monti in Berlin, Ms. Merkel said she was impressed by what she called the Italian government’s “wide reaching” efforts to streamline the economy and cut government spending.
Mario Draghi, president of the central bank, said this month that “a banking license for the E.S.M. is not in agreement with its current design.” Ms. Merkel said Wednesday that this reflected her point of view. “I am personally convinced that these reform efforts will bear fruit, that they will improve Europe’s overall competitiveness,” she said.
Mr. Monti sought to keep the door open to further discussion on the banking license. Ms. Merkel has sought in recent weeks to shift the crisis narrative away from the financial burden being borne by German taxpayers, who remain leery of putting up more of their money for the sake of the euro. Instead, as the crisis begins to drag on German growth, Ms. Merkel has been emphasizing the sacrifices that troubled countries like Italy and Greece have made, and emphasizing how Germany’s economic interests are intertwined with theirs.
“All of these issues must be viewed as a mosaic,” Mr. Monti said after a two-hour meeting with Ms. Merkel. “All of these — the E.S.M., a banking license — are individual mosaic tiles that make up a complete picture.” But even though the German and Italian leaders sought to present a united front on Tuesday, Ms. Merkel ruled out a proposal that Mr. Monti and some other European leaders have advocated as a way to increase the financial clout of Europe’s permanent bailout fund, the European Stability Mechanism.
Both leaders, who were meeting amid a flurry of high-level talks on the debt crisis held in recent weeks, must appeal to a domestic audience that is growing weary of the crisis, but also must win back trust from markets that are looking more for immediate results than long-term structural solutions. Mr. Monti and others have suggested that the E.S.M. could be granted a banking license, which theoretically would allow it to draw low-interest loans from the European Central Bank. The E.S.M. could even issue bonds, and then post them as collateral for E.C.B. loans — in effect printing money. The appeal of that approach is that it would give the E.S.M. much more firepower, without direct commitments from E.U. member nations and the laborious approval process that has been required for each increase in the fund’s size.
Mr. Monti is also battling to drive down Italy’s borrowing costs and spur growth in the euro zone’s third-largest economy, after Germany and France. Both leaders pointed to an Italian bond auction on Wednesday that raised €9 billion, or $11.3 billion, at rates considerably lower than a month ago. But Ms. Merkel said she agreed with Mario Draghi, the president of the E.C.B., that the rescue fund would not be eligible for central bank loans even if it had a banking license. She referred to a statement by Mr. Draghi this month that “the current design of the E.S.M. does not allow it to be recognized as a suitable counterparty.”
Mr. Monti was undeterred. He praised Germany for taking a leadership role in the crisis and showing that each step takes time. But he left the door open for further discussion on the banking license issue, indicating that such a step-by-step approach could also be applied to the bailout funds.
“All of these issues must be viewed as a mosaic,” Mr. Monti said after a two-hour meeting with Merkel. “All of these, the E.S.M., a banking license, are individual mosaic tiles that make up a complete picture.”
Both leaders, who were meeting as part of round-robin European talks being held in recent weeks, face the two-pronged challenge of having to appeal to their own domestic audiences, weary of the crisis, while also trying to win back trust from markets more eager to see immediate results than long-term structural solutions.
Mr. Monti is also is also battling to drive down the debt of Italy, the euro zone’s third-largest economy, after those of Germany and France, and spur growth through efforts that earned praise from the chancellor on Wednesday. Both leaders pointed to a government bond auction in Italy on Tuesday that raised €9 billion at rates considerably lower than a month ago.
“Markets are in the process of recognizing the successes,” Mr. Monti said.“Markets are in the process of recognizing the successes,” Mr. Monti said.
The chancellor has been seeking in recent weeks to shift the crisis narrative in her country away from the focus on the burden being borne by the German public, which is leery of devoting more tax dollars to holding together the European project. At the same time, economic indicators are starting to show that the crisis is cutting into Germany’s growth. Meanwhile, Mr. Draghi, the E.C.B. chief, tried Wednesday to win German support, or at least acquiescence, for measures that are likely to put more German tax money at risk. In an article published by the weekly newsmagazine Die Zeit, Mr. Draghi wrote that the crisis might require the E.C.B. to “go beyond standard monetary policy tools.” This was an apparent reference to proposals that the central bank buy government bonds to bring down borrowing costs for countries including Spain and Italy.
Mr. Draghi, the E.C.B. chief, also tried Wednesday to win German support, or at least acquiescence, for measures that are likely to put more German tax money at risk. In an article published by the weekly newsmagazine Die Zeit, Mr. Draghi said the crisis might require the E.C.B. to “go beyond standard monetary policy tools.” The E.C.B. is expected next week to announce details on how it will try to intervene in the bond market. But the plan has met vehement resistance from Jens Weidmann, the president of the German central bank, the Bundesbank. Mr. Weidmann and other critics have complained that E.C.B. bond buying could shift risk in weaker countries to taxpayers in healthier countries like Germany or Finland, who could end up having to reimburse the central bank for any losses.
This was apparently a reference to proposals that the central bank buy government debt to bring down borrowing costs for countries including Spain and Italy.
The E.C.B. is expected to announce details of how it will try to rein in the bond market next week. But the plan has met vehement resistance from Jens Weidmann, the president of the German central bank, the Bundesbank.
Mr. Weidmann and other critics have complained that E.C.B. bond buying could shift risk in weaker countries to taxpayers in healthier countries like Germany or Finland, because they would have to reimburse the central bank for any losses.
In what amounted to an appeal to the German people, Mr. Draghi said that special measures might be needed “when markets are fragmented or influenced by irrational fears,” or when “monetary policy signals do not reach citizens evenly across the euro area.”In what amounted to an appeal to the German people, Mr. Draghi said that special measures might be needed “when markets are fragmented or influenced by irrational fears,” or when “monetary policy signals do not reach citizens evenly across the euro area.”
The E.C.B. has expressed concern that measures it has taken so far, including record-low official interest rates and more than €1 trillion in low-interest loans to banks, have failed to filter down to businesses and consumers who need credit. The E.C.B. has expressed concern that measures it has taken so far, including record-low official interest rates and more than €1 trillion in low-interest loans to banks, have failed to filter down to businesses and consumers who need credit. Data published Tuesday by the E.C.B. showed that loans to businesses and households declined steeply in July in the countries most in need of economic growth, including Greece, Spain, Portugal and Ireland.
Data published by the E.C.B. Tuesday showed that loans to businesses and households declined steeply in July in the countries most in need of economic growth, including Greece, Spain, Portugal and Ireland. “We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens,” Mr. Draghi wrote in Die Zeit. “This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.”
“We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens,” Mr. Draghi wrote. “This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.” He also implicitly responded to critics at the Bundesbank and in the German Parliament who have said that European countries cannot share financial risk until they create a full political union, with centralized control over national government spending.
Mr. Draghi also implicitly responded to critics at the Bundesbank and in the German Parliament who have said that European countries cannot share financial risk until they create a full political union, with centralized control over national government spending. “Those who claim only a full federation can be sustainable set the bar too high,” he wrote. “What we need is a gradual and structured effort to complete” the European monetary union.
“Those who claim only a full federation can be sustainable set the bar too high,” he wrote. “What we need is a gradual and structured effort to complete” European monetary union.
Jack Ewing reported from Frankfurt.Jack Ewing reported from Frankfurt.