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Tripartite summit expected to focus on ECB

Text by News Wires

Latest update : 2011-11-24

French President Nicolas Sarkozy and German Chancellor Angela Merkel are expected to discuss the role of the European Central Bank in stemming Europe's debt crisis during their meeting on Thursday with Italy’s new prime minister, Mario Monti.

AP - The role of the European Central Bank in stemming Europe’s crippling debt crisis will likely figure prominently in discussions later Thursday between the leaders of Germany, France and Italy.

It’s the first time Italy’s new prime minister, Mario Monti, is meeting German Chancellor Angela Merkel and French President Nicolas Sarkozy since he took charge last week in the wake of growing market concerns over the size of his country’s debts.

The meeting in Strasbourg, France comes amid signs that even Germany and France- the eurozone’s two biggest economies - are not immune from the debt crisis that’s already seen three relatively small countries bailed out.

A failed German bond auction on Wednesday and another warning that France may see its cherished triple A credit rating downgraded, form the uncomfortable backdrop to the discussions between the three leaders.

Though German and French borrowing rates are well below the 7 percent level that eventually forced Greece, Ireland and Portugal into seeking financial bailouts, they have been rising markedly in recent days.

Germany’s ten-year yield has ratcheted up around 0.25 percentage point over the past 24 hours since the auction to stand at 2.12 percent, while France’s has been rising steadily in recent weeks to 3.6 percent on Thursday.

Italy’s though have hovered around the 7 percent level for a couple of weeks now, and that’s a real cause for concern for the eurozone as the current bailout facilities are not big enough to bailout the eurozone’s third-largest economy. Italy’s debts stand at around 1.9 trillion ($2.5 billion), or around 120 percent of the country’s national income.

The meeting is aimed at “showing support for Mario Monti and his policy of reforms,” French government spokeswoman Valerie Pecresse said Wednesday.

However, a big element of the discussions are expected to centre on the European Central Bank’s role, which many think is the only institution capable of calming frayed market nerves. Potentially, the ECB has unlimited financial firepower through its ability to print money.

While Germany finds the idea of monetizing debts unappealing, Sarkozy’s government has been pushing for the ECB to play a more active role.

France has repeatedly been frustrated in its push for the ECB to play a greater role in resolving the crisis by Merkel’s fierce opposition. France’s finance minister, Francois Baroin, has raised the possibility of allowing the ECB to act as lender of last resort to financially troubled countries locked out of lending markets by the punishingly high interest rates increasingly demanded by bond market investors.

Merkel also clashed with the head of the European Union on Wednesday over another proposed solution to the European crisis - common bonds issued by all 17 nations that use the euro currency.

A European bond could promote stability in the markets. But Merkel said it would not solve “structural flaws” with the euro, and, in a testy exchange, an EU official said Merkel was trying to cut off the debate before it could even start.

Date created : 2011-11-24

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