France and Germany agreed on Thursday to stop arguing in public over whether the European Central Bank (ECB) should do more to rescue the eurozone from a deepening sovereign debt crisis.
French President Nicolas Sarkozy and German Chancellor Angela Merkel said after talks with Italian Prime Minister Mario Monti that they trusted the independent central bank and would not touch its inflation-fighting mandate when they propose changes of the EU’s treaty to achieve closer fiscal union.
They also demonstrated their backing for Monti, an unelected technocrat, to surmount Italy’s daunting economic challenges, in contrast to the barely concealed disdain they showed for his -predecessor, former Italian prime minister Silvio Berlusconi.
“We all stated our confidence in the ECB and its leaders and stated that in respect of the independence of this essential institution, we must refrain from making positive or negative demands of it,” Sarkozy told a joint news conference in the eastern French city of Strasbourg.
French ministers have called for the central bank to intervene massively to counter a market stampede out of eurozone government bonds, while Merkel and her ministers have said the EU treaty bars it from acting as a lender of last resort.
Sarkozy said Paris and Berlin would circulate joint proposals before a Dec. 9 EU summit for treaty amendments to entrench tougher budget discipline in the 17-nation eurozone.
Merkel said the proposals for more intrusive powers to enforce EU budget rules, including the right to take delinquent governments to the European Court of Justice, were a first step toward deeper fiscal union.
However, she said they would not modify the statute and mission of the central bank, nor soften her opposition to issuing joint eurozone bonds, except perhaps at the end of a long process of fiscal integration.
Some French and EU officials hoped Berlin would soften its resistance to a bigger crisis-fighting role for the ECB after Germany itself suffered a failed bond auction on Wednesday, showing how investors are now wary even of Europe’s safest haven.
“There is urgency [for ECB intervention],” French Foreign Minister Alain Juppe told France Inter radio before the meeting.
Sarkozy took a step toward Merkel this week by agreeing to amend the treaty to insert powers to override national budgets in eurozone states that go off the rails, but there was no sign of a German concession on eurozone bonds or the ECB’s role.
“This is not about give and take,” Merkel said. “Only when European countries reformed their economies and cut their deficits would borrowing costs converge. To try to achieve this by compulsion would weaken us all.”
With contagion spreading fast, a majority of 20 leading economists polled by Reuters predicted that the eurozone was unlikely to survive the crisis in its current form, with some envisaging a “core” group that would exclude Greece.
Analysts believe that sense of crisis will in the end force dramatic action.
“I think we are moving closer to a policy response probably, which could be either more aggressive ECB action or the idea of euro bonds could gain some traction,” Commerzbank strategist Rainer Guntermann said.
In signs of public resistance to austerity in two southern states under EU/IMF bailout programs, riot police clashed with workers at Greece’s biggest power producer protesting against a new property tax, and Portuguese workers staged a 24-hour general strike.
Credit ratings agency Fitch downgraded Portugal’s rating to junk status, saying a deepening recession made it “much more challenging” for the government to cut the budget deficit, highlighting a vicious circle facing Europe’s debtors.
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