Newly elected French President Francois Hollande
was set to clash with Germany on the issue of eurobonds at a European
Union summit in Brussels on Wednesday, amid mounting concerns about
the possibility of Greece's euro exit and debt crisis contagion to
Spain.
Eurobonds -- the joint issuance of eurozone debts -- would level out
differences between low-yield German bonds and high-yield Spanish and
Italian ones, making debt servicing more expensive for Berlin, but
cheaper for Madrid and Rome.
"It would create utterly false incentives. It would not encourage
financial discipline, but exactly the opposite, and we've had enough
of the opposite," German Finance Minister Wolfgang Schaeuble told
Hamburg-based NDR public radio.
But several economists argue that Germany -- the strongest euro
economy -- needs to pay a price to signal its commitment to stand by
the currency union, which may come undone if a possible Greek exit
ends up unsettling other troubled euro members, like Spain.
In its monthly report, the Bundesbank said developments in Greece
-- where fresh elections are due next month in which anti-austerity
parties may prevail, setting the stage for the country's eurozone
expulsion -- "are extremely worrying."
The European Central Bank (ECB) has even set up a crisis team --
led by the German member of its executive board, Joerg Asmussen -- to
prepare for a Greek exit, German weekly Die Zeit wrote. The ECB
refused to comment on the report.
In Brussels, European Commission President Jose Manuel Barroso
told Greece's caretaker premier, Panagiotis Pikrammenos, that the
country needed to stick to the unpopular austerity terms of its
bailout programme if it wanted to continue receiving EU help.
"The Greek people have made huge sacrifices. I wish there were an
easier way out of the crisis Greece is facing," he said.
Ahead of the dinnertime summit, a teleconference was due to take
place among key participants, comprising ECB President Mario Draghi,
Barroso, E.U. President Herman Van Rompuy and Eurogroup chief and
Luxembourg Premier Jean-Claude Juncker.
As well as some form of eurobonds, the eurozone has been advised
by international bodies like the International Monetary Fund and the
Organisation for Economic Cooperation and Development to prop up
faltering lenders in Spain and Greece.
But German officials have rejected direct financing for banks from
the eurozone rescue fund, while talks on euro-wide deposit guarantee
and bank resolution schemes have gone nowhere. Berlin does not seem
amenable to the idea of helping Greece or Spain by giving them more
time to meet E.U. deficit targets either.
Germany prefers fiscal prudence, coupled with structural reforms.
In an attempt to bridge differences, E.U. Economy Commissioner Olli
Rehn said E.U. leaders should identify the tighter budget rules that
would be needed to precede eurobonds, in order to allay fears that
they might encourage reckless spending.
An example would be the fiscal compact, a German-sponsored budget
discipline treaty -- which Hollande campaigned against, pledging a
renegotiation to add emphasis on growth.
In Paris, government sources said ratification of the treaty would
be on ice "until there are enough (E.U.) growth instruments,"
mentioning a "roadmap" towards eurobonds and a financial transaction
tax.
The Eurogroup presidency is another possible item of negotiation
between Paris and Berlin. German Finance Minister Wolfgang Schauble
is the frontrunner to replace Juncker, but French officials have
suggested he should give up his current job if he wants the post.
French backtracking on the fiscal compact or on the Eurogroup
leadership may give German Chancellor Angela Merkel a chance to
soften her stance on eurobonds.
"(Merkel) hides her cards very carefully. And in the last minute
she plays. In the past there were red lines, and gradually they have
turned pink and white," a European diplomat noted.
Wednesday's talks are not expected to be conclusive. Van Rompuy
said he convened E.U. leaders for a brainstorming session and "to
prepare politically for decisions" that would be taken at a following
summit, scheduled for June 28-29.
