Germany and France push ahead toward fiscal union

GERMANY and France stepped up a drive yesterday for coercive powers to reject eurozone members’ budgets that breach EU rules, as a market rout of European debt eased temporarily on hopes of outside help for Italy and Spain.

German finance minister Wolfgang Schaeuble brushed off a question about the possibility of easing the conditions of Ireland’s bailout in Berlin yesterday.

The Government hopes to get help in dealing with the €32 billion of IOUs on the now defunct Anglo Irish Bank but has been finding it difficult to get any concessions in talks with the troika.

The OECD rich nations’ economic think-tank said the European Central Bank should cut interest rates and abandon its reluctance to step up purchases of government bonds to restore confidence in the eurozone, which now posed the main risk to the world economy.

The ECB shows no sign of doing so yet. It bought €8.5bn of eurozone government debt in the latest week, in line with its previous activity but well short of what economists say is necessary to turn market sentiment around.

In Brussels, finance ministers of the 17-nation currency area meeting today are due to approve detailed arrangements for scaling up the European Financial Stability Facility rescue fund to help prevent contagion in bond markets, and release a vital aid lifeline for Greece.

The signs are the EFSF may not have enough clout, leaving the onus firmly on the ECB.

Berlin and Paris aim to outline proposals for a fiscal union before a European Union summit on December 9 increasingly seen by investors as possibly the last chance to avert a breakdown of the single currency area.

“We are working intensively for the creation of a Stability Union,” the German Finance Ministry said in a statement.

“That is what we want to secure through treaty changes, in which we propose that the budgets of member states must observe debt limits.”

Moody’s Investors Service warned that the rapid escalation of the eurozone sovereign debt and banking crisis threatened all European government bond ratings.

“While Moody’s central scenario remains that the euro area will be preserved without further widespread defaults, even this ‘positive’ scenario carries very negative rating implications in the interim period,” the ratings agency said in a report.

Mr Schaeuble acknowledged on Sunday that it may not be possible to get all 27 EU member states to back treaty amendments, saying agreement should be reached among the 17 eurozone members.

“That can be done very quickly,” he told ARD television.

Sources familiar with the Franco-German negotiations said they were also exploring a deal among a smaller number of countries outside the EU treaty if necessary.

The leaders of two smaller eurozone countries, Finland and Luxembourg, voiced unease regarding the Franco-German plans because they appeared to bypass the European Commission, which is seen as a guarantor of equal treatment for all member states.

“We don’t find this type of system good and I am not too sure if it will get wider support. The disadvantage of this proposal is that it would bypass the EU, the Commission would have a very small role,” Finnish Prime Minister Jyrki Katainen told reporters.

Luxembourg Prime Minister Jean-Claude Juncker who chairs eurozone finance ministers, also warned against looking for instruments outside the EU treaty.

In France, Agriculture Minister Bruno Le Maire said eurozone countries would have to give up some budget sovereignty to save the euro from hostile “speculators”.

“We won’t be able to save the euro if we don’t accept that national budgets will have to be a bit more controlled than in the past,” Le Maire told Europe 1 radio.

“We are in an economic war with a number of powerful speculators who have decided that the end of the euro is in their interest,” he said.

Giving up any fiscal sovereignty is politically sensitive in France, which has a strong Gaullist, nationalist tradition.

Asked whether the Commission would be granted intrusive powers over national budgets in the eurozone, Le Maire said: “Why not? The French people have to realise what is at stake — the preservation of our common currency and our sovereignty.

“What matters is that we ensure that budget discipline is respected within the eurozone. Otherwise the euro itself is threatened.”

On financial markets, the euro regained ground after slipping below $1.33 in Asia and European shares jumped on hopes of fresh measures to fight the debt crisis. Italian, Spanish, French and Belgian bond yields fell, as did the cost of insuring those countries’ debt against default.

But relief may be shortlived as the rally was partly due to an Italian newspaper report that the IMF was in talks to lend Italy up to €600bn, which the IMF flatly denied.