Sparring Ahead of Summit: Merkel Gives Monti the Cold Shoulder

By in Brussels

A showdown threatens to unfold in Brussels Thursday between the German chancellor and Italian Prime Minister Mario Monti. Shortly before the start of the EU summit, Angela Merkel is clearly at odds with Italy's leader. She has also upset Europe's leading euro strategists.

Merkel and Monti at a meeting in Rome on June 22. Will there be showdown in Brussels? Zoom
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Merkel and Monti at a meeting in Rome on June 22. Will there be showdown in Brussels?

A showdown is brewing between German Chancellor Angela Merkel and Italian Prime Minister Mario Monti at the European Union summit in Brussels. Shortly before the start of the key euro crisis meeting on Thursday afternoon, Berlin further stoked its ongoing conflict with Rome.

High-level officials within Merkel's government dismissed complaints from Monti and Spanish Prime Minister Mariano Rajoy over high interest rates for government bonds in their countries as "fearmongering."

"I would warn against projecting interest rates from specific situations as though they were the average," a German government source said. "Interest rates fluctuate." There is no reason to "fall into alarm," the official added.

'Too Much Talk'

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In recent days, Monti and Rajoy have resorted to increasingly shrill rhetoric to indicate that their countries are in desperate need of assistance. They want the euro rescue fund, the European Stability Mechanism (ESM), to buy up Italian and Spanish bonds to push down market interest rates from levels approaching 7 percent, which is considered to be unsustainable for borrowing in the longer term. If the EU summit in Brussels fails to make this happen, then a "catastrophe" awaits, Monti has warned, adding that the euro would then "go to hell". On Thursday, Italy had to offer yields of 6.19 percent in order to float government bonds valuing a total of €5.4 billion ($6.7 billion).

But Berlin has so far been unfazed by Monti's warnings. The view of Merkel's government is that purchasing government bonds is not on the agenda. Sources inside the government are also shaking their heads over a report by Italian daily La Repubblica that Merkel could possibly return to Brussels on Saturday to negotiate with Monti on the subject. Her travel plans have not changed, they said, insisting that Merkel would return to Berlin on Friday afternoon for the vote on ratifying the ESM in Germany's parliament, the Bundestag.

Merkel's government also continues to categorically reject calls for direct bank recapitalization through the ESM, as Spain has demanded. As long as the authority to intervene remains at the national level, such a measure will not be undertaken, the source said. Otherwise, the source warned, a situation could arise in which the ESM became the majority shareholder in a Spanish bank but had no influence over it.

German government officials have pointed out that the ESM was created as an instrument with which to cushion the euro-zone in emergencies. If a government believes it requires aid, then it should apply for it, Berlin government sources said. It will then be processed quickly, as happened when Spain requested a bailout of its banks. But, officials state, the ESM's rules cannot be changed. When a country asks for aid from the International Monetary Fund, the source said, it doesn't tailor its instruments each time just to meet an applicant's needs either.

Merkel Ruffles Feathers in Brussels with Criticism

That's not something Monti and Rajoy will be pleased to hear. They appear to be counting on being able to get special treatment because of their size and power. But the message coming from Berlin is this: We have procedures and we are not going to compromise them. Indeed, this summit isn't about granting more "room for maneuver" or pushing limits, but about adhering to rules that are already clear, government sources said.

German government officials also used unusually sharp language to reject allegations that Germany is exacerbating the euro crisis with its open opposition to collective debt sharing across the common currency area. The government sources said the crisis is only continuing because the problem countries are delaying necessary reforms. "The problems in the countries that are being monitored are homemade and can only be solved at home," the source said.

The way things look right now, the summit will be anything but harmonious. European officials in Brussels are also said to be angered by Merkel's harsh criticism of the proposal for the starting points for discussion at the summit prepared by European Council President Herman Van Rompuy, European Commission President José Manuel Barroso, European Central Bank President Mario Draghi and Euro Group President Jean-Claude Juncker. The chancellor criticized the fact that the discussion paper put too much focus on communitization of debt through euro bond-like structures -- a move the German government currently rejects.

Sources close to the presidents of the four most important EU institutions said the leaders had been very surprised by the German chancellor's choice of words -- particularly given that the contents of the document had been agreed to by all the EU member states.

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