European leaders divided over fund intervention ahead of Brussels Summit

Germany beats Greece (4-2) on the field and off

When German Chancellor Angela Merkel agreed to a meeting of top European leaders in Rome Friday, she already had her eye on the exit.

She wanted to get to the Euro 2012 soccer match in Gdansk that would later see Germany triumph over Greece and send a powerful reminder on and off the field about who is the dominant player in the Eurozone these days.

Merkel even asked for the Rome Summit hosted by Italian Prime Minister Mario Monti to be brought forward by a couple of hours so she could get to the game.

It would be wrong to suggest that Ms. Merkel was giving the cold shoulder to leaders of the other big Eurozone nations, Italy, France and Spain, when they met to consider ways to stabilize the Euro and promote growth.

Relations were cordial as all 4 leaders backed a 130-B Euro growth package and endorsed the Tobin tax on financial transactions as well as stronger political integration to promote employment and growth.

But the German chancellor adamantly opposed a proposal backed by Monti, French President Francois Hollande and Spanish Prime Minister Mariano Rajoy to use the Eurozone's bailout funds to stabilize financial markets.

Christine Lagarde, head of the International Monetary Fund, even weighed into the debate ahead of the Rome talks by calling for greater flexibility to support the Euro and new measures from the European Central Bank.

Under the proposal floated by Monti at the G 20 summit in Mexico last week, both the European Financial Stability Facility which has available funds of 440-B Euros and the European Stability Mechanism which is yet to come into operation, would have the power to buy bonds.

We need to use all existing mechanisms at our disposal to stabilize markets, to promote trust and confidence and fight speculation, Mr. Hollande told a joint media conference at Villa Madama where the top-level talks took place in Rome. This would be an important step.

But asked by the media whether Germany would endorse such a proposal to use the two rescue funds to buy mounting Spanish and Italian debt, Ms. Merkel was unwilling to move.

Responsibility and control go together, Ms. Merkel said. If I give funds directly to a Spanish or another bank I cannot tell them how this bank should act. I am a German chancellor not a Spanish chancellor.

And there lies a particularly chilly divide between the leaders of the two biggest economies in the Eurozone as Hollande also called for jointly underwritten euro bonds sooner rather than later.

I consider Euro bonds to be an option ... but not in 10 yrs, Mr. Hollande said in a direct challenge to the German leader before the media. There can be no transfer of sovereignty if there is not an improvement in solidarity.

Euro bonds would be a useful tool for Europe and I propose this mechanism.

The Rome meeting was promoted as a sign of unity ahead of next week's crucial European Union (EU) summit in Brussels, but simply reinforced disagreement over the bailout issue.

Recently the EU agreed to provide up to 100-B Euros in bailout funds through the Spanish government to the Spanish banks.

But since it was approved, Spanish borrowing costs have increased and there is renewed concern about the impact of the bailout on Madrid's debt and the need for greater action.

There was a further complication Thursday when German President Joachim Gauck announced he would not ratify the creation of the European Stability Mechanism, as planned on 1 July, until legal challenges to the fund had been cleared.

Professor Miguel Maduro, head of the global governance program at the European University Institute in Florence, said strains in the personal relationship between Merkel and Hollande was important but not decisive.

I think the real difficulty is that the interests of France and Germany are not convergent in the current crisis, Mr. Maduro said. Hollande's and Merkel's positions only reflect that.

Mr. Maduro said both leaders may also be using their disaffection to their domestic advantage when dealing with the impact of the economic crisis back home.

But the other unspoken issue for the German chancellor is who will lead Italy when the technocratic government of Mario Monti is eventually replaced.

Italian elections are looming in less than a year from now, Nicola Borri, economics professor at Luiss University in Rome, said.

Germany will not agree to big changes before it knows for sure who will run Italy in the next few years and this is the 'Elephant in the Room' in the Eurozone.

For now Mr. Monti must shore up his support which has taken a beating as the impact of harsh austerity measures and his attempts at labor reforms have divided unions and employers.

A new survey by the SWG research agency released Friday, showed the premier's personal popularity has slumped to 33% from a high of 71% when he assumed office last November, as Italians struggle with higher taxes and rising unemployment in a very grim recession.

Paul A. Ebeling, Jnr.

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.