By Gregory Viscusi and Tony Czuczka - Jul 9, 2012 5:01 AM GMT+0700
French President Francois Hollande and German Chancellor Angela Merkel said friendship between their nations is critical to saving the common currency, putting aside until today their differences on solving the euro debt crisis.
The leaders of the European Union’s two biggest economies met yesterday in the eastern French city of Reims to celebrate the moment 50 years ago when their predecessors, Charles de Gaulle and Konrad Adenauer, signed a reconciliation treaty and buried the enmity that had sparked three wars in 90 years.
Resolving divisions between the two countries will be at the heart of euro-area finance ministers’ talks in Brussels today and during a subsequent gathering on July 20. The two meetings follow clashes between Hollande and Merkel at the June 28-29 European summit, where the German chancellor faced pressure from France, Italy and Spain to agree greater burden sharing for the currency zone’s debt burden.
“At each step of European construction, the German-French friendship was the base,” Hollande said outside Reims cathedral yesterday as he stood alongside Merkel under rainy skies. “I propose to you that we open a new door to even tighter friendship.”
European Union leaders agreed at the June summit to ease the way to direct financing for troubled banks, to start work on Europe-wide bank supervision, and to ease access to the EU’s bailout mechanisms. Finance ministers have been asked to hammer out the details.
Spanish Yields Rise
Yields on Spanish 10-year bonds fell to a three-week low of 6.17 percent after the summit, before rising three consecutive days to end last week at 6.87 percent. The dollar rallied to $1.2291 per euro in New York on July 6, its biggest jump against the common currency since the five days ending Sept. 9.
“The European economic and currency union, as founded 20 years ago, has proved itself not strong enough yet,” Merkel said yesterday at the ceremony. “Our generation has to draw the right lessons from that.”
European sovereign debt yields are a concern and euro area finance ministers should act to counter them, Italy’s Prime Minister Mario Monti said yesterday. Wide spreads were also “a concern for the financial stability of the euro zone” and “for the efficient transmission of monetary policy,” he said during a meeting in Aix-en-Provence, France.
Spanish Prime Minister Mariano Rajoy July 7 pleaded with other euro-area countries to make good on the June summit pledges, which include the option of government bond purchases by Europe’s rescue funds for countries meeting the euro’s existing debt and deficit rules.
‘Words to Deeds’
“It’s time to go from words to deeds,” he said during a speech in Navacerrada near Madrid. “Europe must comply as quickly as possible with the agreements its leaders reached in Brussels. The European project is at stake,” he said.
“Last week’s EU summit delivered measures to manage the euro-area crisis while signaling limited but important progress toward regional integration and burden sharing,” Bruce Kasman, chief economist at JPMorgan Chase & Co., wrote in a note to clients on July 7. “However, this week showed participants interpreting the agreement in widely different ways. These tensions will be evident at the eurogroup meeting.”
Troubled Banks
Among the issues finance ministers will have to tackle today is how to start funneling as much as 100 billion euros ($123 billion) in aid to troubled Spanish banks without boosting the government’s debt load. Ministers are likely to initially channel the money via a Spanish state agency because the 500 billion-euro European Stability Mechanism won’t be operational until a still-unspecified date in the summer, an EU official told reporters in Brussels on July 6 on condition of anonymity.
Direct capital injections by the ESM into banks are unlikely to be authorized before two waves of Spanish recapitalizations are completed by the middle of next year, by when the ECB should have created a Europe-wide bank supervisor, the official said.
French Finance Minister Pierre Moscovici said in an interview with Figaro on July 1 that the French government sees jointly issued bonds as a solution to the crisis, while adding, “I understand that for the moment it’s a red line that our German friends can’t cross.”
Those differences were hidden yesterday in Reims, whose cathedral was badly damaged by German shelling in World War I and where Supreme Allied Commander Dwight D. Eisenhower received the German surrender in World War II.
Flag Waving
Merkel and Hollande greeted crowds waving French and German flags before attending a ceremony at the cathedral where Catholic Archbishop Thierry Jordan read a message in both languages. The leaders opened a museum and then lunched at the town hall after their public addresses.
Hollande and Merkel now face a challenge that concerns not just their countries but Europe and its place in the world, Jordan said at the ceremony.
Hollande mentioned the euro crisis in his speech, saying that the proposed banking union agreed at the EU summit was the “first step to a budgetary union, which will open the way to stability, growth, and tighter ties.”
He said France and Germany must defend the euro with “strict rules, powerful instruments and common policies.”
Merkel’s pursuit of policies opposed by the three other big euro members may be paying off with German voters, who go to the polls in the fall of 2013. Her approval rating rose to 66 percent, the highest since December 2009, in a poll taken after she fended off joint euro-area bonds at the European summit, broadcaster ARD said on July 6.
Greek Plea
France’s Moscovici said yesterday that he expects “tangible progress” at the Brussels meeting, which will also tackle Greece’s plea for a relaxation of its bailout terms and Cyprus’s call for banking aid.
Finance ministers are also expected to fill a vacancy on the European Central Bank’s Executive Board, in a contest between Yves Mersch of Luxembourg and Antonio Sainz de Vicuna of Spain, the official said.
The ECB slot, empty since June 1, has to be filled before the ministers tackle two other sensitive appointments. Luxembourg Prime Minister Jean-Claude Juncker’s term as chairman of euro finance meetings expires on July 17, and the ESM permanent bailout fund requires a head. Germany has nominated Klaus Regling, head of the temporary bailout fund, to manage the permanent one as well.
Moscovici said yesterday that France favors Juncker staying on in the euro group post.
To contact the reporters on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
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