Germany, France draw battle lines over common bonds

Tue May 22, 2012 11:44am EDT
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By Noah Barkin and Leigh Thomas

BERLIN/PARIS (Reuters) - Germany dismissed a French-led call for euro zone governments to issue common bonds, a day before a European Union summit which investors are looking to for new measures to counter the bloc's debt crisis.

After a torrid week, stock markets rallied on optimism that the Wednesday summit would produce measures to foster growth and ward off the threat of contagion should Greece exit the euro.

The FTSEurofirst 300 index of top European shares closed up 1.9 percent and Spanish and Italian borrowing costs fell, leaving scope for disappointment if the EU leaders underwhelm.

New French President Francois Hollande will push a proposal for mutualising European debt at the informal summit, a scheme which many economists and policymakers say could be one of the most effective ways of restoring market confidence. Hollande has also called for a focus on growth rather than austerity.

But there is no sign that Germany, the EU's paymaster, led by Chancellor Angela Merkel, is ready to soften its opposition. Berlin says more progress is needed first on coordinating fiscal policies, a stance in which it has the backing of the Netherlands, Finland and Austria among others.

"Tomorrow's meeting will not deliver any landmark solution. The market is likely to be more prone to disappointment," said Matteo Regesta, a strategist at BNP Paribas.

A senior German official reiterated that Berlin did not believe jointly issued euro zone bonds were the solution and would not change its view, at least in the near term: "That's a firm conviction which will not change in June," the official said at a briefing. A second summit will be held in late June.

European economic commissioner Olli Rehn said the euro zone needed a roadmap spelling out specific integration steps that would eventually lead to joint debt issuance.   Continued...

German Chancellor Angela Merkel (R) listens to French President Francois Hollande during the 2012 NATO Summit in Chicago, May 21, 2012. REUTERS/Jeff Haynes