France and Germany will propose changing EU treaties to improve governance of the euro zone, says French president Nicolas Sarkozy.
Mr Sarkozy spoke after meeting German chancellor Angela Merkel and Italian prime minister Mario Monti in Strasbourg today, their first meeting since Mr Monti took over amid market panic over Italy’s huge debts.
Mr Sarkozy said that the three are committed to saving the euro.
France had been reluctant to make any changes to euro zone governance via treaty changes, something Germany had supported.
But Mr Sarkozy said that France and Germany would present “propositions for the modification of treaties” in the coming days.
"There is urgency (for ECB intervention). We will talk about it today in Strasbourg," French foreign minister Alain Juppe told France Inter radio before the crisis summit of the euro zone's three biggest economies in the eastern French city.
"I think and hope that the thinking will evolve and that the ECB should play an essential role to re-establish confidence," Mr Juppe said.
Mr Sarkozy took a step towards Dr Merkel this week by agreeing to amend the European Union's treaty to permit intrusive powers to change national budgets in euro area countries that go off the rails. But the German leader has so far maintained her line that the treaty forbids the politically independent ECB from acting as lender of last resort to buy government bonds.
With contagion spreading fast, a majority of 20 leading economists polled by Reuters predicted that the euro zone was unlikely to survive the crisis in its current form, with some envisaging a "core" group that would exclude Greece.
In signs of public resistance to austerity in two southern states under EU-IMF bailout programmes, riot police clashed with workers at Greece's biggest power producer protesting against a new property tax, and Portuguese workers staged a 24-hour general strike.
Credit ratings agency Fitch downgraded Portugal's rating to junk status, saying a deepening recession made it "much more challenging" for the government to cut the budget deficit, highlighting a vicious circle facing Europe's debtors.
Fitch cut Portugal to BB+ from BBB-, which is still one notch higher than Moody's rating of Ba2. S&P still rates Portugal investment grade.
German Bund futures fell to their lowest level in nearly a month after Wednesday's auction, in which the German debt agency found no buyers for half of a €6 billion 10-year bond offering at a record low 2.0 per cent interest rate.
Bond investors are effectively on strike, interbank lending to euro area banks is freezing up, ever more banks are dependent on the ECB for funding, and depositors are withdrawing increasing amounts from southern European banks.
A special report by Fitch yesterday suggested France had limited room left to absorb shocks to its finances, such as a new downturn in growth or support for banks, without endangering its triple-A credit status.
Mr Monti's presence in Strasbourg marked Italy's return to grace in Europe after the era of scandal-plagued former prime minister Silvio Berlusconi, who resigned this month. The new prime minister was expected to discuss with Dr Merkel and Mr Sarkozy the economic reforms planned by his government of technocrats.
Keeping Italy solvent and able to borrow on capital markets is vital to the sustainability of the euro zone.
Yesterday's German bond auction pushed the cost of borrowing over 10 years for the bloc's paymaster above those for the United States for the first time since October.
Finance minister Wolfgang Schaeuble's spokesman said the auction did not mean the government had refinancing problems and few on financial markets disagreed. Some analysts said Berlin just needed to offer a more attractive yield.
But it was a sign that, as the bloc's paymaster, Germany may face creeping pressure as the crisis continues to deepen. One senior ratings agency official said it could give Berlin cause to re-examine its refusal to embrace a broader solution.
"It's quite telling that there has been upward pressure on yields in Germany - it might begin to change perceptions," David Beers of Standard & Poor's told a conference in Dublin.
Dr Merkel has shown no sign of bending to calls, most notably from France, to allow the ECB to act more decisively.
She has said the EU treaty bars the ECB from acting as a lender of last resort and printing money to buy government debt. She rejected joint "euro bonds", dismissed a proposal to mutualise the euro zone's debt stock, and rebuffed attempts to allow the bloc's rescue fund to borrow from the ECB or the IMF.
German economy minister Philipp Roesler of the Free Democratic junior coalition partner called today for parliament to jointly reject euro zone bonds "because we don't want German interest rates to rise dramatically".
Yet at the same time, Dr Merkel has declared that the only answer to the crisis was "more Europe" and won endorsement from her party to press for a fully fledged European political union based around the euro zone.
With time running out for politicians to forge a crisis plan that is seen as credible by the markets, the European Commission presented a study yesterday of joint euro zone bonds as a way to stabilise debt markets alongside tougher fiscal rules for member states.
The borrowing costs of almost all euro zone states, even those previously seen as safe such as France, Austria and the Netherlands, have spiked in the last two weeks as panicky investors dumped paper no longer seen as risk-free.
"Bunds are starting to lose their appeal because markets have to believe the euro bonds story and Germany is very close to starting, essentially, to guarantee the debt of other countries," said Achilleas Georgolopoulos, strategist at Lloyds Bank in London.
The crux of an acceleration of the crisis in the past month was Italian bond yields' jump to levels above 7 per cent widely seen as unbearable in the long term, despite stop-go intervention by the ECB to buy limited quantities.
Agencies
