Germany and France clash over ECB role in crisis

FRANCE and Germany, Europe’s two central powers, clashed yesterday over whether the European Central Bank should intervene more forcefully to halt the eurozone’s accelerating debt crisis after modest bond purchases failed to stop the rout.

Facing rising borrowing costs as its AAA credit rating comes under threat, France appeared to plead for stronger ECB action, adding to mounting global pressure spelled out by US President Barack Obama.

Bond market contagion is spreading across Europe. Italian 10-year bond yields have risen above 7%, unaffordable in the long term. Yields on bonds issued by France, the Netherlands and Austria — which along with Germany form the core of the eurozone — have also climbed.

“The ECB’s role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures to ensure financial stability in Europe,” government spokeswoman Valerie Pecresse said after a cabinet meeting in Paris.

But German Chancellor Angela Merkel made clear Berlin would resist pressure for the central bank to take a bigger role in resolving the debt crisis, saying European Union rules prohibited such action.

“The way we see the treaties, the ECB doesn’t have the possibility of solving these problems,” she said after talks with Taoiseach Enda Kenny.

The only way to recover markets’ confidence was to implement agreed economic reforms and build a closer European political union by changing the EU treaty, she said.

Traders said the central bank bought Spanish and Italian bonds yesterday, but the respite was short-lived.

Obama, on a visit to Australia, turned up the heat on Europe to act more boldly to extinguish the spreading bushfire.

“Until we put in place a concrete plan and structure that sends a clear signal to the markets that Europe is standing behind the euro and will do what it takes, we are going to continue to see the kinds of market turmoil we saw,” he said.

European Commission President Jose Manuel Barroso told the European Parliament the eurozone faced a systemic crisis and fragmenting the EU was no solution.

Banks in the eurozone face increasing difficulties in obtaining dollar funding, and while the stresses are nowhere near as acute as they were in the 2008 financial crisis, they have continued to mount despite ECB moves to provide unlimited liquidity to banks.