Published June 27, 2012
German Chancellor Angela Merkel will pit herself against France and Italy on Thursday at an EU summit that could shape the euro zone's future, insisting they must put the bloc's fundamental problems ahead of pleas for emergency action.
European Union leaders go into the two-day meeting in Brussels more openly divided than at any time since the debt crisis erupted in Greece in 2010 and spread over the euro zone.
On the eve of the EU summit, which is due to start at 1300 GMT, Merkel brushed aside demands from Italy and Spain for rapid action to lower their soaring borrowing costs, and poured cold water on proposals backed by France that euro zone countries should assume joint liability for each other's debts.
Many international investors have deserted Spanish and Italian debt, pushing bond yields to levels that Madrid at least cannot afford for long as it simultaneously tries to save its banks ravaged by a property market collapse and cut its spiraling budget deficit.
Merkel accused top EU officials of getting their priorities wrong by proposing common euro zone debt before EU controls are in place on national budgets and economic policies.
"I fear that at the summit we will talk too much about all these ideas for joint liability and too little about improved controls and structural measures," she told parliament in Berlin on Wednesday.
French President Francois Hollande is championing joint "eurobonds" to bring down borrowing costs for the weaker euro zone countries as the pool of guarantors would include the strongest - meaning Germany.
But before the summit - the EU's 20th since the crisis began - Merkel repeated her objections to the plan, saying even Europe's strongest economy must not be overburdened.
She left the door ajar to eventual joint debt issuance. But she offered no immediate moves to ease the crisis and insisted governments must commit to giving EU institutions the power to override their budgets and make them change policy before there could be any shared liability for Europe's debt.
"Joint liability can only happen when sufficient controls are in place," she said. The remarks appeared to be a less definitive rejection of common euro zone bonds than she made behind closed doors on Tuesday, when she said she did not expect to see shared debt liability in her lifetime.
This insistence that the summit focus on long-term fixes put her at odds with a top European Commission official.
Economic and Monetary Affairs Commissioner Olli Rehn said European leaders would work at the summit on short-term steps to relieve market pressure on countries at risk.
"It is essential that (short-term policy measures) are decided by the European Council," Rehn told reporters.
Spanish Prime Minister Mariano Rajoy said he would ask other EU leaders to allow the bloc's bailout funds or the European Central Bank to stabilize financial markets.
Rajoy warned that Spain could not live indefinitely with yields on its 10-year bonds near seven percent. "The most urgent issue is the one of financing. We can't keep funding ourselves for a long time at the prices we're currently funding ourselves," he told parliament.
Spain is one of five euro zone countries - more than a quarter of the total - to request euro zone bailout funds as it needs up to 100 billion euros to recapitalize its banks.
Madrid won time on Wednesday to negotiate the terms of the bank aid when it gained approval for a state liquidity guarantee of 19 billion euros for Bankia, the country's biggest problem lender.
Spain has been seeking a temporary mechanism to fund four nationalized banks that urgently need money, since it could take three to four months for the European aid to reach the country's financial system.
EU divisions have been more openly displayed since Hollande, a Socialist, ousted conservative Nicolas Sarkozy as French president last month, challenging Merkel to move away from austerity, promote economic growth and mutualise Europe's debts.
Merkel finds herself in a dwindling minority in the EU, backed only by the Netherlands and Finland, but she holds the euro zone's purse strings and therefore nearly all the cards.
Rome and Madrid, now in the financial markets' firing line, have muscled into the traditional Franco-German axis.
Leaders of the four countries held a discordant news conference in Rome on Friday and Merkel met Hollande on Wednesday evening to try to repair the damage.
"I say we need more Europe and I think we are in agreement there," Merkel said in Paris. "We need a Europe that functions effectively, markets are looking for this, and a Europe where countries help each other."
Cyprus - which this week joined Greece, Ireland, Portugal and Spain in requesting European bailout money - won support from its euro zone partners for emergency funding to prop up its banks, crippled by their Greek debt holdings, in assistance which will probably include aid from the IMF.
In Rome, Italian Prime Minister Mario Monti said on Tuesday he would not simply rubber stamp conclusions at the EU summit and was ready to go on negotiating into Sunday evening if necessary to agree on measures to calm markets.
Stock markets perked up last week on hopes that the summit would come up with dramatic measures. Investors have since thought better of that view.