French President Nicolas Sarkozy will press German Chancellor Angela Merkel on Thursday to let the European Central Bank act decisively to rescue the euro zone from a deepening sovereign debt crisis now hitting Germany.
French officials hope Berlin will relent in its opposition to a greater crisis-fighting role for the ECB after Germany itself suffered a failed bond auction on Wednesday, highlighting how investors are now shunning even Europe's safest haven.
"There is urgency (for ECB intervention). We will talk about it today in Strasbourg," Foreign Minister Alain Juppe said on France Inter radio, hours before the French, German and Italian leaders were due to meet 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," Juppe said.
Sarkozy took a step towards 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 ECB from acting as lender of last resort to buy euro zone 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.
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, sent Bund futures down to their lowest level in nearly a month on Thursday as confidence in German debt continued to be shaken.
Investors are also unnerved by reports that Belgium is leaning on France to pay more into emergency support for failed lender Dexia under a 90-bln-euro rescue deal that had appeared done and dusted.
Merkel, Sarkozy and new Italian Prime Minister Mario Monti were also expected to discuss the reforms planned by Italy's new government of technocrats marking Rome's return to grace in Europe after the era of scandal-plagued former Italian prime minister Silvio Berlusconi, who resigned this month.
The 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.
GERMAN EXPOSURE
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.
Merkel showed no sign on Wednesday of bending to calls, most notably from France, to allow the ECB to act more decisively.
In a forceful speech to the Bundestag, the lower house of the German parliament, she warned against fiddling with the bank's strict inflation-fighting mandate. She also hit back at proposals from the European Commission on joint euro zone bond issuance, calling them "extraordinarily inappropriate".
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.
The crux of an acceleration of the crisis in the past month is Italian bond yields' jump to levels around 7% widely seen as unbearable in the long term, despite intervention by the ECB to buy limited quantities.
STABILITY BOND
In a Reuters poll conducted over the last 10 days, 14 out of 20 prominent academics, former policymakers and independent thinkers agreed the euro zone's make-up would change.
"The euro zone can and should survive, but it will not survive on the current trajectory," said Jeffrey Sachs, Director of the Earth Institute at Columbia University in New York.
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 on Wednesday of joint euro zone bonds as a way to stabilise debt markets.
