EU's ultimatum to Germany: act now to save the euro

Barroso demands launch of joint eurozone bonds

New York

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 will "soon present options" for the introduction of a common European debt union.

Stock markets across Europe rose following Mr Barroso's speech as investors interpreted it 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 in the direction of the issuance of government bonds underwritten by all 17 nations of the eurozone looks set to run into a brick wall in the shape of the German Chancellor Angela Merkel.

Last month, Ms Merkel described eurobonds as "exactly the wrong answer". And 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."

Mr Barroso's call came as leading EU finance officials warned ministers in unusually strong terms that Europe faces a fresh freeze in lending unless a "vicious circle between sovereign debt, bank funding and negative growth" can be broken. They highlighted a sense of alarm in European capitals about the financial crisis which they fear could cause the system to collapse.

Speaking after several days of rising panic in financial markets, Mr Barroso stressed eurobonds "will not bring an immediate solution for all the problems we face", and accepted that their introduction would probably require a new EU treaty. But the Commission's President insisted that "deeper integration is part of the solution".

Ms Merkel and the French President, Nicolas Sarkozy, held a conference call with their Greek counterpart, George Papandreou, yesterday evening, to discuss Athens's progress on reducing its deficit, which is required 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 of borrowing have been driving debt and equity markets down since last week. Last night a spokesman for the Greek government confirmed that the country will stay in the eurozone.

Eurobonds pose a potentially lethal threat to Ms Merkel's coalition. The junior coalition partners of her Christian Democrat party, the Free Democrats, have indicated they would walk out of the government if there was any move down the road of a common debt union. The Social Democrats (SPD) and the Green Party support eurobonds provided they come with strong conditions attached. And a new opinion poll yesterday put the SPD on 29 per cent and the Greens on 19 per cent, which is enough to give them a comfortable majority in the Bundestag in the event of an early election.

Yet the picture is further complicated by the verdict last week of the German Constitutional Court, which indicated it might regard a common eurozone debt union illegal.

The US is also stepping up pressure on European leaders. The Treasury Secretary, Tim Geithner, made some of his strongest comments to date, urging bigger and faster action to prevent a full-blown financial crisis. He accused the eurozone of "terribly damaging political dysfunction" and said: "Ultimately, what you have to do is put the economy above politics."

Mr Geithner is flying in to join a meeting of European finance ministers tomorrow, in part to share the US experience of dealing with the financial crisis of 2007-09.

Speaking in New York, he predicted Europe would avoid a bank collapse like the Lehman Brothers bankruptcy three years ago, because of "a tradition of indulgence and support for their institutions". He said: "I remember the Chancellor saying to the President of the United States repeatedly in private meetings, and in public, 'We are not going to have a Lehman Brothers'. She recognises she has got to do more to make that commitment credible in the eyes of the world."

The US has watched the gathering financial crisis in Europe with increasing alarm. Last month, the Federal Reserve held meetings with senior executives at some of the eurozone financial institutions with major businesses in the US, to get a clearer picture of their liquidity position and their contingency planning in case of a Greek default and other problems.

And Mr Geithner said that what happens in the eurozone will be critical for the world economy. "Europe matters to us mostly because it adds to a caution around the world at a time when we are still healing from the crisis," he said.

An extraordinary day in Euroland

09:20 The President of the European Commission, José Manuel Barroso tells European Parliament that he will draw up proposals for Eurobonds – an idea previously ruled out by Angela Merkel and Nicolas Sarkozy. Stock markets temporarily rally.



12:00 The European Central Bank announces that two banks have tapped its emergency borrowing facility. $575m was lent from the liquidity fund, operated jointly with the US Federal Reserve. The two bidders were not named.



13:15 The government of Silvio Berlusconi narrowly wins a vote of confidence in Parliament, by 316 votes to 302, paving the way for vote on austerity measures. News of the vote's success leads to anger outside the Italian parliament in Rome, where protesters are involved in clashes with riot police, above.



15:35 Austrian parliamentary committee delays a vote on ratifying changes to European Financial Stability Fund. Ratification of the bailout fund – established in July alongside the second Greek bailout – could be delayed until October.



18:00 German Chancellor Angela Merkel, French President Nicholas Sarkozy and Greek Prime Minister George Papandreou hold conference call on Wednesday evening to discuss unfolding crisis, at the end of another day of market turmoil.

Q&A

Q. Wasn't this eurozone crisis supposed to have been sorted out already?

Yes. There was an emergency meeting of eurozone leaders in Brussels in July. This produced an agreement to sanction a new bailout for Greece and to allow a special eurozone fund, the European Financial Stability Facility, to buy up the sovereign bonds of distressed eurozone nations.



Q. So why hasn't this done any good?

Because the July agreement hasn't been ratified by the eurozone's national parliaments yet. This delay forced the European Central Bank to step in and buy Spanish and Italian bonds last month. The Bundestag is due to vote to increase the powers of the EFSF on 29 September. But Chancellor Merkel is facing an increasingly difficult job to get her coalition to vote for the deal.



Q. But if that's passed it will all be OK, right?

No. There are increasing signs that the huge spending cuts and tax rises that Athens agreed to implement are killing, rather than curing, the Greek economy. And even if austerity works and Athens gets its new bailout loans, it is becoming clear that Greece's total debt burden, at around 160 per cent of GDP, is simply too large for it to cope with.



Q. So what is needed to solve the problem?

A larger EFSF would help. So would an agreement to recapitalise Europe's banks. Many argue that a collective eurozone debt union is the only thing that will calm investors.

Life and Style
Customers can get their caffeine fix on the move
food + drink
Life and Style
techCould new invention save millions in healthcare bills?
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Voices
Mosul dam was retaken with the help of the US
voicesRobert Fisk: Barack Obama is following the jihadists’ script
PROMOTED VIDEO
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
Flat out: Michael Flatley will return to the stage in his show Lord Of The Dance
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Arts and Entertainment
Loaded weapon: drugs have surprise side effects for Scarlett Johansson in Luc Besson’s ‘Lucy’
filmReview: Lucy, Luc Besson's complex thriller
Arts and Entertainment
Jamie T plays live in 2007 before going on hiatus from 2010
arts + entsSinger-songwriter will perform on the Festival Republic Stage
Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
News
Jermain Defoe got loads of custard
i100
News
peoplePamela Anderson rejects ice bucket challenge because of ALS experiments on animals
Arts and Entertainment
tvExecutive says content is not 'without any purpose'
News
A cleaner prepares the red carpet for the opening night during the 59th International Cannes Film Festival May 17, 2006 in Cannes, France.
newsPowerful vacuum cleaners to be banned under EU regulations
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Data Insight Manager - Marketing

£32000 - £35000 Per Annum: Clearwater People Solutions Ltd: Our client based o...

Data Centre Engineer - Linux, Redhat, Solaris, SAN, Puppet

£55000 per annum: Harrington Starr: A financial software vendor at the forefro...

.NET Developer

£600 per day: Harrington Starr: .NET Developer C#, WPF,BLL, MSMQ, SQL, GIT, SQ...

Data Centre Engineer - Linux / Redhat / Solaris / Puppet / SAN

£65000 per annum: Harrington Starr: A financial software vendor at the forefro...

Day In a Page

Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

Waxing lyrical

Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
From slow-roasted to sugar-cured: how to make the most of the British tomato season

Make the most of British tomatoes

The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
10 best men's skincare products

Face it: 10 best men's skincare products

Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
Malky Mackay allegations: Malky Mackay, Iain Moody and another grim day for English football

Mackay, Moody and another grim day for English football

The latest shocking claims do nothing to dispel the image that some in the game on these shores exist in a time warp, laments Sam Wallace
La Liga analysis: Will Barcelona's hopes go out of the window?

Will Barcelona's hopes go out of the window?

Pete Jenson starts his preview of the Spanish season, which begins on Saturday, by explaining how Fifa’s transfer ban will affect the Catalans
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape