By Stephen Brown and Jan Strupczewski
BERLIN/BRUSSELS (Reuters)
- Germany and France stepped up a drive on Monday for coercive powers
to reject national budgets in the euro zone that breach EU rules, as a
market rout of European debt eased temporarily on hopes of outside help
for Italy and Spain.
The OECD rich nations'
economic think-tank said the European Central Bank should cut interest
rates and step up purchases of government bonds to restore confidence in
the euro area, which now posed the main risk to the world economy.
In Brussels, finance
ministers of the 17-nation currency area meeting on Tuesday are due to
approve detailed arrangements for scaling up the European Financial
Stability Facility rescue fund to help prevent contagion in bond
markets, and release a vital aid lifeline for Greece.
Berlin and Paris aim to
outline proposals for a fiscal union before a European Union summit on
Dec. 9 increasingly seen by investors as possibly the last chance to
avert a breakdown of the single currency area.
"We are working
intensively for the creation of a Stability Union," the German Finance
Ministry said in a statement. "That is what we want to secure through
treaty changes, in which we propose that the budgets of member states
must observe debt limits."
It dismissed a report by
the newspaper Die Welt that Germany and the five other euro zone states
with top-notch AAA credit ratings could issue joint bonds for themselves
and partners.
Moody's Investors Service
warned that the rapid escalation of the euro zone sovereign debt and
banking crisis threatened all European government bond ratings.
"While Moody's central
scenario remains that the euro area will be preserved without further
widespread defaults, even this 'positive' scenario carries very negative
rating implications in the interim period," the ratings agency said in a
report.
Finance Minister Wolfgang
Schaeuble acknowledged on Sunday that it may not be possible to get all
27 EU member states to back treaty amendments, saying agreement should
be reached among the 17 euro zone members.
"That can be done very
quickly," he told ARD television, adding that it only required changing
an additional protocol to the EU's Lisbon Treaty.
Sources familiar with the
Franco-German negotiations said they were also exploring a deal among a
smaller number of countries outside the EU treaty if necessary.
"END OF THE EURO"?
The leaders of two
smaller euro zone countries, Finland and Luxembourg, voiced unease about
the Franco-German plans because they appeared to bypass the European
Commission, which is seen as a guarantor of equal treatment for all
member states.
"We don't find this type
of system good and I am not too sure if it will get wider support. The
disadvantage of this proposal is that it would bypass the EU, the
Commission would have a very small role," Finnish Prime Minister Jyrki
Katainen told reporters.
Luxembourg Prime Minister
Jean-Claude Juncker, who chairs euro zone finance ministers, also
warned against looking for instruments outside the EU treaty.
In France, Agriculture
Minister Bruno Le Maire said euro zone countries would have to give up
some budget sovereignty to save the euro from hostile "speculators".
"We won't be able to save
the euro if we don't accept that national budgets will have to be a bit
more controlled than in the past," Le Maire told Europe 1 radio.
"We are in an economic
war with a number of powerful speculators who have decided that the end
of the euro is in their interest," he said.
Handing over fiscal
sovereignty to the executive European Commission is politically
sensitive in France, which has a strong Gaullist, nationalist tradition.
President Nicolas
Sarkozy's office sought to quash a weekend newspaper report that Berlin
and Paris were planning to confer "supranational powers" on Brussels,
suggesting such intrusion would only apply to countries such as Greece
that were under EU/IMF bailout programmes.
Asked whether the
Commission would be granted intrusive powers over national budgets in
the euro zone, Le Maire said: "Why not? The French people have to
realise what is at stake -- the preservation of our common currency and
our sovereignty.
"We'll see if it's the
council (of ministers) or some other European institution (that
exercises these powers). What matters is that we ensure that budget
discipline is respected within the euro zone. Otherwise the euro itself
is threatened."
He acknowledged that
France and Germany were still at odds over greater ECB intervention to
rescue the euro but said: "We will have to find a compromise."
On financial markets, the
euro regained ground after slipping below $1.33 in Asia and European
shares jumped on hopes of fresh measures to fight the debt crisis.
Italian, Spanish, French and Belgian bond yields fell, as did the cost
of insuring those countries' debt against default.
But relief may be
short-lived as the rally was partly due to an Italian newspaper report
that the International Monetary Fund was in talks to lend Italy up to
600 billion euros -- more than its entire war chest -- which the IMF
flatly denied.
The European Commission
also said Italy had not asked for any amount of money and there were no
discussions at European level on aid for Rome.
IMF inspectors are due in
Rome this week to examine Italy's public finances after former Prime
Minister Silvio Berlusconi agreed earlier this month to submit to
regular monitoring of his promised austerity measures and economic
reforms.
IMF TO THE RESCUE?
EU officials say some
sort of IMF programme could make sense for both Italy and Spain as part
of a multi-pronged response, involving the ECB and the euro zone rescue
fund, to supervise reforms and restore investor confidence in their
debt.
A senior EU source
confirmed that both Berlusconi and the European authorities had rejected
an IMF offer of a 50 billion euro precautionary credit line for Italy
in talks on the sidelines of the Cannes G20 summit on Nov 3. The source
said the sum would have been insufficient to convince markets.
Reuters reported
exclusively last week that Spain's People's party, due to form a
government by mid-December, is considering seeking IMF aid as one option
for shoring up public finances.
In its world economic
outlook, the Organisation for Economic Cooperation and Development
forecast growth in the euro area will slow -- under a baseline scenario
of "muddling through" -- to 0.2 percent in 2012 from an estimated 1.6
percent in 2011.
Urging "a substantial
relaxation of monetary conditions", the OECD said banks would need to be
well capitalised and policies put in place for sovereigns to finance
themselves at reasonable rates.
"This calls for rapid,
credible and substantial increases in the capacity of the EFSF together
with, or including, greater use of the ECB balance sheet," the OECD
said.
OECD chief economist Pier
Carlo Padoan said current plans to leverage the euro zone bailout fund
were insufficient. What was needed was a multiple of what was currently
on the table.
Euro zone leaders
initially planned to leverage the EFSF up to 1 trillion euros, but the
fund's head said it is now unlikely to achieve that.
EFSF chief Klaus Regling
was quoted by lawmakers as telling German coalition lawmakers that
leveraging by a factor of 4-5 was "no longer reachable because of the
clear deterioration of the market environment". Instead, it might be 3-4
times the fund's size.
The fund has had trouble
selling its own bonds to raise funds and has yet to attract the pledges
it hoped to get from countries with sovereign wealth to invest.
(Additional reporting by
Leigh Thomas in Paris, Emelia Sithole-Matarise in London, Matthias
Sobolewski in Berlin, Ian Chua in Singapore,; writing by Paul Taylor;
editing by Philippa Fletcher/Mike Peacock)
