Sarkozy set to clash with Merkel over euro bonds


Another attempt to end the eurozone debt crisis and persuade the German chancellor Angela Merkel to accept eurozone bonds – pooling all the existing nations' national debts – will be made by President Sarkozy at a crisis summit on Tuesday.

It comes against a backdrop of worried investors throughout the world despairing at the lack of political leadership being shown in the world's various sovereign debt crises. Second-quarter growth figures are announced for the eurozone this week. City analysts predict a modest 0.3 per cent average growth – despite Germany's continued strong performance.

Meanwhile, the Italian finance minister Giulio Tremonti, fresh from imposing another austerity programme, stepped up his calls for a more coordinated response to the eurozone debt crisis, including the creation of euro bonds or eurozone bonds.

Mr Tremonti was one of the first to come up with idea, together with the chair of the eurozone group of finance ministers, the Luxemburger Jean-Claude Juncker. Mr Tremonti argued at the weekend that jointly issued bonds would effectively make individual governments' debt a common burden, and said they were the "master solution" to the euro zone debt crisis: "We would not have arrived where we are if we had had the euro bond." The sentiment has been echoed frequently by the Chancellor, George Osborne, from the most important European economy ousted from the eurozone.

However, the idea was summarily rejected by his German counterpart Wolfgang Schaeuble, who said such bonds would undermine the basis for the single currency by weakening fiscal discipline among member states: "I rule out euro bonds for as long as member states conduct their own financial policies, and we need differing interest rates so that there are possibilities of incentives and sanctions to force fiscal solidity.

"Without that kind of solidity, there is no found-ation for a joint currency," he added, though of course the French president has long argued for a form of "European economic governance" with a European Monetary Fund that could deliver just such a solidity.

Thus, the chances of Franco-German accord seem bleak. Germany still fears the immense loss of economic sovereignty implied in such a move, as well as the higher interest rates Germans would have to pay on their debts. On the other hand, the pressure on the French president is also building to intolerable levels.

Mr Sarkozy in the past backed the idea of eurobonds, including at the eurozone summit last month that agreed the terms of the second bailout package for Greece. Since then, however, the market view has grown that France will be the next major advanced nation to lose its cherished AAA credit rating, after America. French banks too are suffering from rumours about imminent failure. Already the cost insuring French bonds, via the credit default swaps market, exceeds that of some emerging states such as Mexico.

The shock news last Friday that France's economic recovery has shuddered to a halt, with zero growth in the second quarter, has also undermined confidence in the French government's ability to control events. If the second largest eurozone nation were to come under the sort of pressure suffered by Greece, Portugal and Ireland, then few would give the single currency surviving in anything like its current form.

Mr Tremonti said there were "strong expectations" hanging over the encounter between Merkel and Sarkozy: "A lot depends on the choices which may be made about Europe and for Europe in the coming days."