Analysis: Eurozone crisis

Hollande-Merkel fail to agree on eurobonds ahead of Euro-summit

Reuters/Philippe Wojazer

Like a celebrity couple denying rumours of impending divorce, France and Germany insist that everything is fine between them. But, at a meeting French President François Hollande on Wednesday, German Chancellor Angela Merkel refused to budge on her opposition to eurobonds ahead of a crucial European Union summit on Thursday and Friday.


“Things are going well between France and Germany,” France’s European Affairs Minister Bernard Cazeneuve told the iTélé TV channel Thursday, while admitting that there are some “topics for discussion”.

Dossier: Eurozone in crisis

After Wednesday’s meeting in Paris, Hollande declared that both leaders wanted to “deepen economic and monetary union” and advance towards political union in the future, his idea of a compromise on Germany’s particular hobbyhorse – a speedy move towards federalism.

And Merkel last week accepted Hollande’s proposal for a boost to growth worth 130 billion euros, watering down her previous austerity-only stance when Italy and Spain backed France’s call for the move.

But the German chancellor remains resolutely opposed to sharing the eurozone’s debt through issuing eurobonds or any other variation on that theme.

"Apart from the fact that instruments like eurobonds, eurobills, debt redemption schemes and much more are not compatible with the constitution in Germany, I consider them wrong and counterproductive," she told the Bundestag, having earlier in the week pledged that there would be no pooling of eurozone debt “as long as I’m alive”.

Her stance puts her at odds with most of her eurozone partners as well as the US, China and the International Monetary Fund (IMF).

Parliamentary elections 2012

US President Barack Obama, who made a point of speaking to Hollande before the Merkel meeting, is worried that European economic worries will weaken US recovery and damage his electoral prospects.

But he’s not the only one with his eye on the polls.

Merkel’s Christian Democrats have suffered electoral setbacks recently and she has no intention of accepting one Europhile German commentator’s advice to sacrifice her career for the Europe’s sake.

Some economists argue that Germany has benefited from the euro far more than any other eurozone country, thanks to improvements in its competitiveness and balance of payments. But much of the German media insist that the country’s taxpayers have subsidised feckless southern Europeans, boosting resentment of the Greek bailout and resistance to debt-sharing.

So, with her country the only major European country to experience growth in the first quarter of this year, Merkel is sticking to her guns ahead of a federal election scheduled for late next year.

That’s despite grim news from most of Europe:

  • Britain is deeper into recession than previously thought, with a 0.4 per cent decline in October-December 2011 and an estimated 0.3 per cent decline in January-March 2012, confirming that it has entered a double-dip;
  • Spain cannot finance itself at current interest rates and may need a full-blown bailout, Prime Minister Mariano Rajoy said Wednesday, as the central bank said its recession is deepening;
  • Italy had to pay much higher rates of return at a short-term bond auction Wednesday; Cyprus has requested a bailout to protect its banks, exposed to Greek debt;
  • France experienced no growth in the first quarter of 2012 and its unemployment rate is likely to rise to 10.4 per cent, even if it manages to attain a feeble growth rate of 0.2 per cent by the end of the year, according to the Insee statistics institute.

Nevertheless, the euro rose against the dollar in Asia on Thursday ahead of the European summit.

The meeting is set to agree the growth plan, although, at one per cent of the bloc’s GDP, it may not be the emergency treatment needed.

It will also discuss moves towards integrating eurozone structures, which may lead to more Franco-German spats as well as annoying British eurosceptics.

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