Last week, Europe’s debt crisis spread to countries that have suffered worrisome financial setbacks, including France, whose borrowing costs were nearly double that of Germany on Monday. Underscoring France’s precarious position, Moody’s announced Monday that the country’s closely guarded triple-A credit rating could be at risk.
Letting countries borrow against the credit of the European Union “makes sense” if they are forced to abide by strict financial guidelines as a condition, European Commission President Jose Manuel Barroso said at a news conference in Brussels on Monday.
“We need more discipline in the euro area,” he said, adding that the financial crisis happened “because governments of Europe did not respect their commitments.”
Detailed proposals on how to let countries borrow money with European backing will be released Wednesday, Barroso said.
A draft of the recommendations that was leaked to the news media gave three scenarios, ranging from most radical but most effective, to least effective but easiest to implement quickly.
But German officials quickly hit back on Monday, saying they opposed anything that could put their taxpayers’ money at risk because of other countries’ borrowing. The European bailout has been deeply unpopular among German voters, and policymakers there have struggled to balance the need to keep the continent from plunging into a deep recession against their worries that letting fiscally troubled countries off the hook by giving them more money would encourage them to delay reforming their unhealthy economic policies.
“The chancellor and the federal government do not share the belief of many that euro bonds would now be a kind panacea for the crisis,” Steffen Seibert, a spokesman for German Chancellor Angela Merkel, said at a news conference in Berlin on Monday. He said that a more considered examination of Barroso’s proposals would have to wait until they are released.
The European Commission’s most radical proposal would allow countries to borrow money with the full backing and guarantees of the euro zone. But that would require years of treaty changes and would force countries to abide by strict controls over their spending. And the plan would probably not be implemented in time to fight the problems at hand. A more modest alternative wouldn’t put full euro-zone guarantees behind the bonds, meaning far less money would be at risk. That plan could be put into place more quickly, but it would do less to ease borrowing costs.
The euro-zone-wide economic reforms and fiscal controls of the more ambitious plan are similar to those that Germany has separately begun pushing for. Some German analysts have questioned whether those efforts are simply laying the groundwork for acceptance of euro bonds. But Merkel and her partners have consistently rejected that idea.
European markets plunged on Monday, even though Spain’s prime-minister-elect, Mariano Rajoy, promised to put his country back on track after leading his center-right People’s Party to win elections by historically large margins on Sunday. Markets in Germany and France closed down more than 3 percent. London’s FTSE 100 index closed down 2.4 percent.
Spain’s borrowing costs rose to 6.48 percent Monday, and Rajoy spoke with Merkel. He told the German chancellor that “those countries that meet their obligations and responsibilities must be helped by European institutions,” Bloomberg News reported, quoting Maria Dolores de Cospedal, deputy leader of Rajoy’s People’s Party.
“Spain cannot continue financing itself at 7 percent,” Cospedal told reporters late Monday. “So an agreement through a joint euro-zone operational strategy to save and guarantee our sovereign debt has to come from the European institutions.”