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Friday, Jul 27, 2012 3:15 PM UTC

Germany, France: determined to protect eurozone

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Germany, France: determined to protect eurozoneFILE - In this July 8, 2012 file photo German Chancellor Angela Merkel, left, and French President Francois Hollande react after a speech in front of Reims cathedral, in Reims, eastern France. Merkel and Hollande said in a joint statement issued by the German government Friday, July 27, 2012 that their countries are "deeply committed to the integrity of the eurozone." They said eurozone members and European institutions "must comply with their obligations, each in their own are of competence." (AP Photo/Pool/Jacky Naegelen, File)(Credit: AP)

BERLIN (AP) — The leaders of Germany and France added their weight to the battle to preserve the European single currency when they issued a joint statement Friday promising to do everything they can to stop the 17-country bloc from breaking up.

The statement from Chancellor Angela Merkel and President Francois Hollande was brief and didn’t spell out any specific course of action. But it offered a show of unity by the leaders of the eurozone’s two biggest economies.

“Germany and France are deeply committed to the integrity of the eurozone,” the two leaders said in their statement. “They are determined to do everything to protect the eurozone.”

To achieve that, they added, eurozone members and European institutions “must comply with their obligations, each in their own area of competence.”

The statement, made after a telephone conversation between the two leaders Friday, came a day after Mario Draghi, president of the European Central Bank, told business leaders in London that the ECB would do “whatever it takes” to preserve the euro and raised expectations that he could step in to lower the high borrowing costs that are crippling countries like Spain and Italy.

Concerns about the 17 countries that use the euro have intensified over the past few weeks as evidence builds that economies across the region face deepening recessions. Spain and Italy, in particular, are finding it increasingly expensive to raise money on the debt markets due to spiraling borrowing costs. Investors are losing confidence that the countries will be able to control their debt while they are in recession.

Fears have also resurfaced that bailed-out Greece might yet be forced out of the single currency if it fails to carry out reforms that were a condition of its financial rescue.

Merkel and Hollande underlined the need to “implement quickly” decisions made by a European Union summit last month.

Those decisions included allowing Europe’s bailout fund — once a new, independent bank supervisor is set up — to give money directly to a country’s banks, rather than via the government. Countries that pledge to implement reforms demanded by the European Union’s executive Commission also would be able to tap rescue funds without having to go through the kind of tough austerity measures demanded of Greece, Portugal and Ireland.

Markets across Europe rose following the statement with the FTSE 100 up 0.7 per cent and Germany’s DAX index up 1.1 percent. In Spain, the main IBEX stock index was up 2.7 per cent while the borrowing rate on its 10-year bond — a bellwether of market confidence in a country’s ability to manage its debt — was down to 6.73 percent. In Italy, the FTSE MIB stock index had risen 2.7 percent and its 10-year bond’s interest rate was had fallen to 5.95 percent.

European finance ministers last week signed a rescue package worth up to €100 billion ($122 billion) for Spain’s ailing banks, but concern flared about Spain’s prolonged recession and the debts of its regions, causing the country’s borrowing costs to rise.

Merkel and Hollande made no specific reference to the ECB’s role in helping solve the crisis, but Merkel’s finance minister earlier Friday welcomed the remarks Draghi made. The comments have raised expectations that the ECB could step in to lower high borrowing costs — possibly by buying government bonds.

The ECB has bought bonds to fight the crisis over the past two years, but has kept the program on hold for months. The bond purchases weren’t popular in Germany, which feared the ECB was taking on excessive risk and argued that governments should bear the responsibility of restoring confidence in their economies by reducing public debt and reforming their labor markets.

Finance Minister Wolfgang Schaeuble welcomes Draghi’s pledge to “take the necessary measures to secure the euro in the framework of the existing ECB mandate,” a ministry statement said. It didn’t say anything about what those measures could be.

“The condition for this is that policymakers also take and implement the necessary measures to deal with the financial and confidence crisis,” it added. “In the first place stand the reform efforts of the countries themselves.”

Merkel and Sarkozy frequently issued joint declarations on the eurozone crisis, but the conservative German chancellor and the Socialist Hollande initially appeared at odds over how to handle it. Hollande has been critical of Germany’s focus on painful austerity measures and called for a greater emphasis on growth.

Still, the pair has stressed the need for Germany and France to work together, and last month’s summit featured an agreement on a package meant to encourage growth.

More Geir Moulson.

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