Plans for eurobonds put EU on collision course with Germany

The president of the European Commission, Jose Manuel Barroso, issued a stark warning to Germany yesterday that eurobonds could be the price of preventing a break-up of the single currency. Addressing the European Parliament, Mr Barroso said the Commission would "soon present options" for the introduction of a common European debt union.

Stock markets across Europe rose as investors interpreted the speech as a sign that the Continent's leaders are finally prepared to do what is necessary, in their view, to guarantee the future of the single currency.

But any move towards issuing government debt underwritten by all 17 eurozone nations looks likely to be blocked by the German Chancellor, Angela Merkel. Last month, she described eurobonds as "exactly the wrong answer". Yesterday her Foreign Minister, Guido Westerwelle, said: "We are opposed as far as the instrument of eurobonds is concerned because we believe you can't fight debt in Europe by making it easier to take up debt."

Ms Merkel and the French President, Nicolas Sarkozy, held a conference call with their Greek counterpart, George Papandreou (inset above), yesterday evening to discuss Athens' progress on reducing its budget deficit – a prerequisite for the release of a new tranche of eurozone/IMF bailout funds. Fears that Greece could be about to renege on its agreement and embark on a disorderly default on its €350bn (£305bn) of sovereign borrowing have been driving debt and equity markets down since last week. Last night a spokesman for the Greek government confirmed the country would stay in the eurozone.

Eurobonds pose a potentially lethal threat to Ms Merkel's coalition. The junior partners of her Christian Democrat party, the Free Democrats, have indicated they would quit the government if there was any prospect of a common debt union. The Social Democrats and the Green Party have given eurobonds qualified support.

The US is also stepping up pressure on European leaders to resolve the crisis. The Obama administration's Treasury Secretary, Tim Geithner, urged bolder and faster action yesterday to prevent a full-blown financial crisis. He accused the eurozone of "terribly damaging political dysfunction".