Merkel bluntly rejects euro bonds as crisis solution

GERMAN Chancellor Angela Merkel bluntly rejected eurozone bonds as a solution to the currency area’s sovereign debt crisis, saying “collectivising debts” would not solve the problem.

Meanwhile, the European Union’s top economic official said he expected international lenders to be able to recommend by the end of the month releasing a vital tranche of aid to Greece, warding off the threat of an imminent default.

While that may keep Greece afloat until it gets a second bailout package from the eurozone, the finance minister said the country would remain mired in recession through 2012, the fourth year in a row, a contraction that is only likely to fuel popular outrage at the austerity drive.

Spain and France both found good demand for their bonds at auctions, but while Paris’ short-term borrowing costs fell, Madrid had to pay dearly to sell longer-term debt despite support from the European Central Bank in the secondary market.

Speaking a day after the head of the European Commission raised financial market hopes by pledging to present options soon for issuing such common bonds, Merkel said: “Euro bonds are absolutely wrong.

“In order to bring about common interest rates, you need similar competitiveness levels, similar budget situations. You don’t get them by collectivising debts,” she said in a speech at the Frankfurt auto show.

The chancellor, facing rising public opposition to eurozone bailouts, said there was no quick and easy way out of the debt crisis, only a step-by-step process of individual countries putting their fiscal houses in order.

Many investors see joint debt issuance as the best way out since it would reassure markets that Europe’s strongest economies were taking responsibility for weaker states.

Germany, the eurozone’s main paymaster, argues that it would raise the borrowing costs of virtuous countries and remove the incentive for profligate states such as Greece or Italy to clean up their public finances.

European Central Bank policymaker Lorenzo Bini Smaghi highlighted that risk in a speech in Rome yesterday. “Without stringent constraints, euro bonds risk favouring fiscal policies that, on average, are more expansionary, and a higher debt, whose cost is also shared among the more disciplined countries.”

And other analysts have described euro bonds as a “get-out-of-jail-free card” for European banks.