Central bankers play down claims by European politicians about the 'unlimited firepower' for bailout funds
European politicians and central bankers were at odds on Wednesday on the eve of a crucial meeting of eurozone policymakers that has encouraged speculation about "unlimited firepower" for bailout funds to resolve the crisis.
While Mario Monti, the Italian prime minister, spoke hopefully of the eurozone's bailout fund being granted a banking licence and access to endless funding from the European Central Bank, Jens Weidmann, head of Germany's powerful Bundesbank, strongly opposed radical action.
The 23-strong governing council of the ECB will meet on Thursday in Frankfurt for the first time since the ECB chief, Mario Draghi, declared a no-holds-barred fight to save the euro last week in London.
Draghi's pledge to "do whatever it takes" to save the currency and the confidence he voiced that "it will be enough" triggered a euro rally over the past week and curbed bond market pressure on Spain and Italy.
Since then European leaders have lined up to make similar pledges using virtually identical language. Chancellor Angela Merkel of Germany, President François Hollande of France, Monti, and Jean-Claude Juncker of Luxembourg, the president of the eurogroup, have all parroted Draghi, encouraging belief in the markets that the ECB is about to revive a dormant policy of intervening to buy up the bonds of distressed sovereigns, cut interest rates again from an all-time low of 0.75%, or support a more activist role for the European Stability Mechanism, the main eurozone bailout fund.
Draghi and the political leaders all also committed themselves to "the integrity" of the eurozone, suggesting a renewed resolve not to allow any of the 17 members, most particularly Greece, to leave the currency.
The Austrian government and its central bank chief have been arguing for the past 10 days that the ESM should be granted a banking licence enabling it to tap unlimited liquidity from the ECB to prop up teetering eurozone governments.
"[Draghi's] statement last week was interesting, bold and appropriate," Monti said in Finland on the latest leg of his tour to persuade eurozone leaders to act to bring down the costs of Italian borrowing. "I was in particular impressed by the clarity with which the president said excessive differences between interest rates undermine the transmission of monetary policy."
This was seen as pressure on the ECB to revive a policy, frozen since last summer because of German resistance, of buying government bonds.
Monti also said that the ESM bailout fund, which will not be operational until next month at the earliest, would obtain a banking licence. But the Bundesbank is strongly opposed to such action, the German government has dismissed all talk of a bank licence for the ESM, and in an interview published yesterday Weidmann sounded a warning to Draghi.
The ECB must "not overstep its own mandate," he said in an interview released by the Bundesbank to mark the institution's 55th birthday.
The Finnish prime minister is also taking a hard line. "Finnish people believe in rule-based union. [For us] a rule does not mean the starting point for creative interpretation," said Jyrki Katainen.
But the central conflict is between Weidmann and Draghi. The two men are expected to meet on Thursday morning before the governing council session. Weidmann complained eurozone politicians were abusing the ECB for "fiscal policy objectives".
"European countries today are not at loggerheads despite the common currency, but because of it," noted Jean Pisani-Ferry, head of the Bruegel thinktank in Brussels.
Weidmann delivered an implicit warning that German public opinion would not tolerate the kind of interventionist role for the ECB being pushed by others and that if German confidence in the ECB is wrecked the euro will be in even deeper trouble.
"In Europe, we are faced with some quite different ways of looking at the central bank's role – not only in politics, but also in the media and on the part of the general public. If a central bank also has to work against public opinion, things get difficult."
In Athens, the three leaders backing the country's fragile coalition agreed on the parameters of an €11.5bn (£9bn) package of spending cuts demanded by creditors in return for further EU-IMF rescue loans.
After days of often fraught talks, all three leaders had "accepted the prime minister's proposal" about what the cuts should be, the finance minister Yiannis Stournaras said.
But disagreement over the savings continues to run deep and Fotis Kouvellis, the leader of the small Democratic Left party, emerged from Wednesday's discussions saying the talks would continue. He insisted the government would continue to press international creditors to give the recession-plagued country more time to meet budget deficits by extending its fiscal consolidation programme from 2014 to 2016. The leaders' eventual aim was to "gradually disengage" from the arduous terms of the loan agreement, he said.
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