France and Germany agreed on Thursday to stop arguing in public over whether the European Central Bank should do more to rescue the euro zone from a deepening sovereign debt crisis.
President Nicolas Sarkozy and Chancellor Angela Merkel said after talks with Italian Prime Minister Mario Monti that they trusted the independent central bank and would not touch its inflation-fighting mandate when they propose changes of the European Union's treaty to achieve closer fiscal union.
They also demonstrated their confidence in Monti, an unelected technocrat, to surmount Italy's daunting economic challenges, in contrast to the barely concealed disdain they showed for his predecessor, media billionaire Silvio Berlusconi.
"We all stated our confidence in the ECB and its leaders and stated that in respect of the independence of this essential institution we must refrain from making positive or negative demands of it," Sarkozy told a joint news conference in Strasbourg.
French ministers have called repeatedly for the central bank to intervene decisively to counter a market stampede out of euro zone government bonds, while Merkel and her ministers have said the EU treaty bars it from acting as a lender of last resort.
Sarkozy said Paris and Berlin would circulate joint proposals before a Dec. 9 EU summit for treaty amendments to entrench tougher budget discipline in the 17-nation euro area.
Merkel said the proposals for more intrusive powers to enforce EU budget rules, including the right to take delinquant governments to the European Court of Justice, were a first step towards deeper fiscal union.
But she said they would not modify the statute and mission of the central bank, nor soften her opposition to issuing joint euro zone bonds, except perhaps at the end of a long process of fiscal integration.
French aides had hoped Berlin would relent in its opposition to a bigger crisis-fighting role for the ECB after Germany itself suffered a failed bond auction on Wednesday, highlighting how investors are wary even of Europe's safest haven.
Sarkozy took a step towards Merkel this week by agreeing to amend the treaty to insert powers to change national budgets in euro area countries that go off the rails.
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.
Analysts believe that sense of crisis will in the end force dramatic action. "I think we are moving closer to a policy response probably, which could be either more aggressive ECB action or the idea of euro bonds could gain some traction," said Rainer Guntermann, strategist at Commerzbank.
RESISTANCE
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.
German bonds 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 bln euro 10-year bond offering at a record low 2.0% interest rate.
The shortage of bids drove Germany's cost of borrowing over 10 years to 2.2%, above the 1.88% markets charge the United States and the 2.18% that heavily indebted Britain has to pay.
Italian bond yields' jumped this month to levels above 7% widely seen as unbearable in the long term, despite stop-go intervention by the ECB to buy limited quantities, triggering Berlusconi's fall.
Keeping Italy solvent and able to borrow on capital markets is vital to the sustainability of the euro zone. Key Italian bond auctions early next week will test market confidence.
