FRANCE AND GERMANY opened an EU summit today on a collision course over how to spur growth in the debt-stricken eurozone, as markets plunged and the euro hit a near two-year low.
“We have to act straight away for growth… otherwise there will still be doubt on the markets,” new French President Francois Hollande insisted amid deepening worries over Greece’s eurozone future and Spain’s troubled banks.
“We have no time to waste,” the freshly-elected Socialist leader stressed on arrival for his first EU summit after a cost-conscious train ride from Paris.
German Chancellor Angela Merkel faced mounting pressure to give ground on her hardline austerity doctrine as the European single currency fell to $1.2564 and London, Frankfurt and Paris stock exchanges each shed well over two per cent.
But she rejected a call by Hollande for eurobonds – jointly pooled eurozone debt – which the French leader considers a potential solution to the crisis.
“I believe that they are not a contribution to stimulating growth in the eurozone,” Merkel said, adding that such instruments were expressly forbidden by the EU’s own treaties.
Berlin fears eurobonds would only result in German taxpayers permanently underwriting the public finances of weaker eurozone economies.
Financial Transaction Tax
Non-euro Britain was also shaping as a force to be reckoned with, blocking other core ideas put forward by European Union officials and backed by Hollande – including a tax on financial transactions.
London vehemently rejects the tax, home as it is to three quarters of Europe’s financial services industry.
Opening the dinner talks, EU president Herman Van Rompuy underlined the need to find “a strong will to compromise” with the risk of knock-on effects from a Greek eurozone exit exercising markets.
After Germany’s central bank said the picture in Athens ahead of June 17 elections was “highly alarming,” leaders were expected to warn Greek voters that Athens must honour a €237 billion bailout deal agreed in March.
“I don’t believe we can afford to allow this issue to be endlessly fudged or put off,” said British Prime Minister David Cameron, notably urging the ECB to get behind the single currency.
Treasury officials from the other 16 eurozone member states were told this week to “reflect” on what an exit would mean for their economies in preparation for eventual “coordination concerning what each must do on a European level,” a diplomat from one eurozone country told AFP.
The Greek finance ministry in Athens “categorically” denied this was the case.
Contingency planning that diplomats called “commonsense” stems from arguably even greater worries about Spain and Italy, after a report by Fitch Rating agency showed foreign investors had fled Spanish and Italian debt in huge numbers.
Spain’s 10-year borrowing rates have soared to above 6.0 per cent in recent weeks while German borrowing costs hit a record low of 1.390 per cent today.
“These differences may prevent us from meeting our deficit targets,” Spanish Prime Minister Mariano Rajoy said before boarding the train with Hollande after talks in Paris.
Rajoy said Spain did not require the support of European rescue funds, saying there were “faster instruments” — an apparent allusion to the European Central Bank which has previously bought government bonds in the secondary markets in times of stress.
Analysts see this as inevitable, with consultant Sony Kapoor warning: “Unless something is done to arrest the decline in Spain, it is headed towards needing a fully-fledged bailout.”
Wednesday’s talks were not intended to deliver concrete decisions, but were set to endorse a trial for EU “project bonds” to attract long-term private investment for Europe’s incomplete energy, transport and digital networks.
These would not be mutually guaranteed as eurobonds would be, but use 230 million euros from the EU budget this year and next, and hopefully unlock 4.5 billion euros of total public and private-sector investment.
Other ideas on the table include a 10-billion-euro boost to European Investment Bank (EIB) capital designed to release what the Commission said would be 180 billion of new private investment.
Leaders will also look at a call to unlock EU “structural funds” that the Commission says are worth some 82 billion euros, much of which is stuck in national coffers.