Franco-German rift widens over ECB role in debt crisis

Europe's power brokers France and Germany were miles apart Tuesday over allowing the European Central Bank to rescue the eurozone from a debt crisis threatening to engulf major economies. The debate raged as Spain's borrowing costs soared at its first debt auction since a weekend general election swept the right to power, highlighting the intense pressure the markets are imposing on European governments. But German Chancellor Angela Merkel maintained Berlin's hard line against letting the ECB act as a lender of last resort, saying that this "wouldn't work." Germany is implacably attached to the independence of the central bank and fears that allowing the ECB to step in to buy the bonds of distressed eurozone countries on a greater scale could stoke inflation. Jens Weidmann, the head of the Bundesbank, Germany's central bank, warned that there were "significant stability risks" attached to making the ECB intervene. The bond market pressure has fueled calls for the ECB to act as a lender of last resort to put an end to a crisis that has festered for two years and now threatens to snuff out growth in advanced economies. France has pushed for a bigger ECB role and proposed that the Frankfurt institution be allowed to lend funds to the eurozone's bailout fund without limits. "We still face a major difficulty, which is to convince Germany that we must give the eurozone a defence tool for our currency through a certain evolution of the central bank's role," said French Prime Minister Francois Fillon. The French government is fighting to defend the country's prized triple-A credit score but ratings agency Moody's has warned that higher borrowing costs, slowing growth and the eurozone crisis were putting it at risk. The US ambassador to the EU, William Kennard, weighed in on the debate, saying Washington was "watching very intently what the ECB is able to do and the potential for it to do more." He added: "The outcome of this crisis is pretty unpredictable. We don't know how it will be solved." Amid fears the crisis could plunge the world into recession, the United States has urged Europe to act quickly to find a lasting solution. But Washington was mired in its own debt battle after a US Congress committee failed to agree on how to trim the deficit. As France and Germany crossed swords over the ECB, the new leaders of Italy and Greece tried to convince EU leaders they will contain debt crises rocking their countries. Italian Prime Minister Mario Monti met with the EU's top officials in Brussels on his first trip abroad since his cabinet of technocrats took power after the crisis felled Silvio Berlusconi's government. Monti told reporters he would "respect commitments" to cut spending but he was cautious on the goal of balancing the budget by 2013, saying there was a need to "take into account the (economic) cycle to calculate this objective." The Italian leader, who is pushing through an austerity and economic reform programme to slash Italy's 1.9-trillion-euro debt pile, will meet with Merkel and French President Nicolas Sarkozy in Strasbourg, France, on Wednesday. Meanwhile in neighbouring Luxembourg, another technocrat brought to power by the crisis, Greek Prime Minister Lucas Papademos, held talks with the head of eurozone finance ministers Jean-Claude Juncker. But Papademos was unable to produce a letter demanded by foreign lenders which would show that all parties in his unity government are committed to reforms required in return for urgent bailout funds. Juncker said he was optimistic that all Greek coalition partners will abide by EU demands in time for a meeting of eurozone finance ministers next week, despite reluctance from the conservative party. "Would there be no cross-party agreement, that disbursement of course could not take place," Juncker warned. The flurry of meetings came on the eve of new proposals to be unveiled by the European Commission suggesting stricter policing of eurozone members' budgets and raising the possibility of issuing joint bonds to pool debt among the 17 euro nations. But Merkel stressed the time was not yet ripe for a debate over eurobonds. "If we have to have this debate, then it is more appropriate to have it at the end (of the crisis) and therefore I do not think it is right to have it now, in the middle of the crisis, as if it were the answer," she said. "In the long term, it is not." French President Nicolas Sarkozy reaffirmed Tuesday that he and Merkel would soon make joint proposals for EU treaty changes to ensure that eurozone states adhere to fiscal discipline. "Madame Merkel and I will soon make proposals for treaty modifications in order to prevent states from diverging in budgetary, economic or fiscal policy," said Sarkozy.