‘Economic government’ proposal gets frosty reception

FRANCO-GERMAN proposals to boost fiscal convergence in the eurozone have been given a cool response from other member states and failed to convince investors that the bloc’s debt crisis was closer to being solved.

Traditional German ally, Austria, criticised plans announced by Chancellor Angela Merkel and French President Nicolas Sarkozy to move towards an “economic government” in which euro states would agree to give up sovereignty over economic policy.

A separate proposal, to write German-style “debt brake” rules into national constitutions across the 17-nation currency bloc by mid-2012, faces big hurdles, given that Mr Sarkozy himself is struggling to secure a parliamentary majority for such a plan at home.

Finland’s finance minister questioned whether such a rule would work at all and said she was “not too excited” about making changes to her country’s constitution.

Before the meeting, some investors had held out hope that the leaders of the bloc’s two biggest economies would take bolder steps, such as agreeing to joint eurozone bond issues or boosting the size of their rescue fund.

But both governments had made it clear in the run-up to the Paris summit that neither of these steps was under serious consideration.

By avoiding bold short-term solutions, Ms Merkel and Mr Sarkozy left responsibility for warding off any new market attacks to the European Central Bank (ECB), which has bought tens of billions of euro in bonds from weakened debtors such as Italy and Spain to prevent the zone from breaking apart.

“I think the crisis, in fact, is likely to get worse before it gets better despite the announcements that we had yesterday,” said Jacques Cailloux, chief European economist at RBS.

“The ECB is trapped here,” said Mr Cailloux. “So I think we could end up having €150 billion to €200bn of Spanish and Italian bonds on the ECB balance sheet in the next month and a half.”

Eurozone leaders agreed a month ago to give their rescue mechanism the power to buy bonds, but that decision must be approved by national parliaments before it can take effect.

Some of the steps unveiled on Tuesday would have seemed almost revolutionary as recently as a year ago.

Ms Merkel bowed to longstanding French calls to hold regular meetings of eurozone leaders and appoint a symbolic president, or spokesman, for the bloc — steps that are bound to widen the divide between euro “ins” and “outs” in the 27-nation EU.

But in the midst of a crippling crisis that has threatened to engulf big countries such as Spain, Italy and France, the announcements were criticised by many as “too little too late”.

The euro edged up against the dollar, pushing above the $1.45 mark for the first time in three weeks.

Spanish and Italian 10-year bond yields hovered near 5%, more than a percentage point below where they stood before the ECB first intervened in the markets earlier this month.

Spain and Italy are holding out hope Ms Merkel and Mr Sarkozy will change their minds and embrace joint eurobonds.