France and Germany Split on ECB’s Role in Rescue
French Finance Minister Francois Baroin risked clashing again with Germany after saying that European Central Bank support for Europe’s rescue fund is the best way to counter the debt crisis.
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“We consider that the best way to avoid contagion is to have a solid firewall” by giving the fund a bank license, said Baroin in a speech in Paris late yesterday. “We haven’t won the argument. We won’t make it a casus belli, but naturally we continue to think it would be the best way to bring stability to Europe.”
However, the French stance is running into resistance from German Chancellor Angela Merkel’s government, which opposes enlisting further support from the ECB.
“If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen,” Merkel said in a speech in Berlin today.
The ECB itself has also resisted calls to provide more support. ECB President Mario Draghi said on November 3 that backstopping government borrowing lies outside the ECB’s realm of authority.
But now France, the second-biggest backer of the European Financial Stability Facility after Germany, finds itself being dragged further and further into the crisis.
The premium France pays over Germany to borrow for 10 years climbed 200 basis points today, the highest since 1990. Yields on Dutch, Finnish, Austrian, Italian, and Spanish debt also rose this week. Spain sold 3.56 billion euros of a new 10-year benchmark at an average yield of almost 7%, a euro-era record high.
“Nothing spreads like fear,” said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London. “If the European Central Bank does not intervene forcefully to stop the rot, the panic could spread even further and eventually put the very existence of the euro and the ECB at risk.”
France’s 10-year bonds now yield about 3.7%, compared to 2.2% for U.K. gilts and 2% for U.S. Treasuries. Both the U.K. and U.S. governments are benefiting from bond purchases by the Bank of England and the Federal Reserve.
So while French President Nicolas Sarkozy earlier backed down over the role the ECB should play in fighting the debt crisis, France could be changing its stance in the face of a very real and present threat to its economy.