Berlin and Paris agree to stop public sniping

FRANCE and Germany agreed yesterday to stop arguing in public over whether the European Central Bank should do more to rescue the eurozone from a deepening sovereign debt crisis.

President Nicolas Sarkozy and 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 European Union’s treaty to achieve closer fiscal union.

They also demonstrated their backing for Mr Monti, an unelected technocrat, to surmount Italy’s daunting economic challenges, in contrast to the barely concealed disdain they showed for his predecessor, media billionaire 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,” Mr Sarkozy told a joint news conference in the 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 Ms Merkel and her ministers have said the EU treaty bars it from acting as a lender of last resort.

Mr Sarkozy said Paris and Berlin would circulate joint proposals before a December 9 EU summit for treaty amendments to entrench tougher budget discipline in the 17-nation euro area.

Ms 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.

But she said they would not modify the statute and mission of the ECB, 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.

Mr Sarkozy took a step toward Ms Merkel this week by agreeing to amend the treaty to insert powers to override national budgets in euro area 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,” Ms 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.”

Analysts believe that sense of crisis will in the end force dramatic action in the eurozone.

“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,” said Rainer Guntermann, strategist at Commerzbank.

Mr Monti yesterday repeated Italy’s goal of achieving a balanced budget by 2013 but said there was room for discussion about how fiscal targets could be adjusted in a worse-than-expected recession.

Italian bond yields’ jumped this month to levels above 7% widely seen as unbearable in the long term. Keeping Italy solvent and able to borrow on capital markets is vital to the sustainability of the eurozone.

Key Italian bond auctions early next week will test market confidence.