French and German political leaders this week reiterated their commitment to defending the euro and financial stability in the eurozone. “Our determination is total,” said President Nicolas Sarkozy at a joint Franco-German cabinet level meeting on Friday.
Whereas Sarkozy pledged to “do what it takes,” his German counterpart, Angela Merkel, was more specific. She said to oppose enlargement of the European Financial Stabilization Facility, which was first used for the first time two weeks ago to bail out Ireland.
Ireland renewed fears of Europewide debt crises last month and was forced to tap into the multibillion euro rescue fund that was set up by European leaders in the wake of the meltdown in Greece this spring.
Expansion of the fund is “not a question,” said the chancellor who pointed out that the Irish required less than 10 percent of the total stability package.
As Ireland braces for spending cuts, investors continue to worry about the fiscal situation in other highly indebted countries, including Portugal. A European rescue effort of Portugal would be possible but the specter of Spain’s demise is calling the future of the eurozone into question. A crisis in Spain, which has an economy twice the size of Greece, Ireland and Portugal combined, would severely test Europe’s ability to maintain economic stability if not the single currency itself.
Should Spain succumb to panic, the contagion that will ensue is likely to affect other countries, in particular Belgium and Italy, which remain mired in both fiscal and political uncertainty. Under such circumstances, it is difficult to imagine the eurozone surviving as a whole.
The European Central Bank succeeded in restoring some calm to markets this week by buying the bonds of those countries most at risk. Yet concerns that the purchases can provide only temporary relief, and that Europe’s efforts so far to stop the spread of the crisis have failed, are prompting calls for political action. These include proposals by some European leaders for a joint bond issuance or a hike in the size of the EU’s bailout funds. Luxembourg Prime Minister Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti have publicly suggested that the eurozone issue a portion of its debt jointly through what they like to call “E-bonds.”
Economies in the core of Europe, including Austria, Germany and the Netherlands, are adamantly opposed to such a scheme. At their meeting Friday, Chancellor Merkel and President Sarkozy both spoke out against the proposal. “We must not put the cart before the horse,” according to Sarkozy. “If one day there is a lot more integration and a much more harmonized economic policy, we could maybe talk about it then.”
Earlier this week Juncker lambasted Germany as being “un-European” for dismissing his proposal but lately, it seems that whatever Angela wants, Angela gets. She has pushed for tougher budget rules and treaty reform even if most other European leaders dread the necessity process which could call for referendums in countries that once rejected the Lisbon Treaty, including Ireland.
As the eurozone’s largest economy, Germany already bears the brunt of the Greek and Irish bailout efforts. Joint bond issuance would likely exacerbate German borrowing coasts, putting further financial pressure on what remains the economic powerhouse of the European Union. Without a clear upper house majority and without certainty of support from her coalition partners on financial reform policy, the German chancellor cannot afford to ignore mounting resentment with voters who complain that they are footing the bill for financial woes in neighboring countries.