The push for common borrowing, or euro bonds, would be a major step in the direction of a fully integrated euro-zone economy, creating a titan that would rival the U.S. economy in size and strength. Such newly issued bonds could restore reasonable borrowing rates for troubled economies such as Italy and Spain by putting the might of Germany’s frugal taxpayers behind them.
Despite the support for the measure voiced by a growing number of European leaders, however, German officials bluntly ruled it out Tuesday.
“You can wake me up in the middle of the night, at 3 a.m., and I will tell you our position. Or 5 a.m., it doesn’t matter. We think that euro bonds are not the right path for many reasons,” a senior German government official told reporters in Berlin, under a customary ground rule of anonymity.
The opposition from Berlin appears to cut off any discussion of major steps toward common borrowing, because the advantages of pooled credit would come mainly at Germany’s expense. German officials have said that euro bonds can be considered only after other countries have slashed their debt and committed to tough rules on fiscal responsibility. The proposal also faces substantial legal hurdles, given that Germany’s constitutional court has ruled that German taxpayers’ money cannot be used to bail out foreign nations mired in debt.
In addition, Germany has expressed skepticism about proposals to allow the euro zone’s bailout funds to go directly to troubled banks to help boost their capital, in part because it fears that loosening the rules could become a back-door way to finance government borrowing.
Germany’s hard line comes as more voices are being raised in favor of debt-sharing measures. Last weekend, British Prime Minister David Cameron endorsed the idea of euro bonds, even though his country does not use the euro. On Tuesday, International Monetary Fund Managing Director Christine Lagarde called for more steps toward common debt, though she also praised the tough economic measures Germany has advocated, such as opening labor markets.
“More needs to be done, particularly by way of fiscal liability-sharing,” Lagarde told reporters in London, the Reuters news agency reported.
Hollande’s push from Paris might simply be a bargaining tactic to pressure his neighbor into backing narrower growth measures that could ease the crisis. What European leaders are likely to actually agree on remains much more modest than euro bonds, though it could be enough for Hollande to back down and claim victory after running a successful presidential campaign against Nicolas Sarkozy on a platform of renegotiating the German-backed fiscal pact that commits euro-zone countries to strict controls on debt and spending.
Hollande and German Chancellor Angela Merkel have said that they need to do more to promote economic growth in the euro zone. But they have split on how to do that, with Merkel leaning more toward tough economic overhauls that avoid committing additional taxpayer money to fixes, and Hollande being more sympathetic to stimulus measures, though France has little spare money to commit.
European officials said Tuesday that although nothing would be finalized at the Wednesday meeting, leaders were likely to agree to a more limited form of common debt known as project bonds, which allow jointly financed borrowing for specific infrastructure projects administered through European Union institutions. Merkel has indicated that she is also open to bolstering the lending power of the European Investment Bank, which would give a bump to small businesses, and to spending unused E.U. funds on infrastructure projects in struggling countries.
Such a move could prove beneficial for near-bankrupt Greece, with a possible new injection of euros for earmarked projects potentially offering some relief after years of recession. But given the narrow scope of any likely agreement, a deal to bolster infrastructure spending alone is unlikely to dramatically boost sagging growth across Europe.
“In a broader context, these measures are likely to be relatively small, a drop in the ocean, given the size of the overall economy in Europe,” said Juergen Michels, an economist at Citigroup in London.
Europe’s problems remain formidable, the Organization for Economic Cooperation and Development said Tuesday, as it forecast a mild recession for the euro-zone economy in 2012 and meager growth in 2013. The U.S. economy, by comparison, is expected to grow by 2.4 percent this year and 2.6 percent the next, it said.
“The euro area remains the single most serious risk for the global economy, and recent events have increased that risk,” Pier Carlo Padoan, the OECD’s chief economist, told reporters in Paris. His worst-case projection for Europe is a 2 percent contraction this year, and the OECD recommended for the first time that Europe move toward jointly issued borrowing, even as it said that stringent economic overhauls are necessary in the long run to make struggling European countries more competitive.
The United States has fared better because it has not had to take as much harsh economic medicine, said James Ashley, a senior European economist at RBC Capital Markets in London. In the United States, the “imbalances in the private sector weren’t as pronounced, with the exception of the housing market, but the bulk of that correction has already happened,” he said. “In Europe, there is a lot more ground to cover.”
Few appear optimistic that Europe has seen the last of its problems.
“This gap is widening, and there is a danger of a general bank run in the euro zone,” said Clemens Fuest, an economist at the University of Oxford and an adviser to the German Finance Ministry. “The situation is rather serious.”
Faiola reported from London.