Global investors headed for the eurozone exit on Thursday after leaders of the area's three biggest economies squashed residual market hopes for a huge intervention by the European Central Bank (ECB) to solve the sovereign debt crisis.
Fears of an imminent banking crisis are expected to intensify on Friday as inter-bank lending freezes over again, billions of euros are withdrawn from "Club Med" banks and the ECB is forced to lend more to struggling institutions. The central bank could reportedly extend the term of its loans to two or even three years.
UK borrowing costs fell below those of Germany briefly on Thursday as the yields on eurozone sovereign debt rose, the euro fell against the dollar and European equities suffered a ninth successive day of losses. Friday is expected to be no different.
Angela Merkel again ruled out any expanded role for the ECB and stamped down proposals for single, eurozone-wide "eurobonds" to share the risk of sovereign debt. The ECB, she said, was only responsible for monetary policy.
At a news conference in Strasbourg, the French president, Nicolas Sarkozy, and the new Italian prime minister, Mario Monti, fell meekly into line, with Sarkozy dropping French demands for urgent and expansive intervention by the ECB.
He and Merkel instead pointed to forthcoming plans for (unspecified) European Union treaty changes to advance a (distant) fiscal union in the eurozone. The Franco-German allies, who represent the traditional engine of EU integration, plan to set out their proposals before an EU summit on 9 December.
Their plans, which could be endorsed at an unscheduled eurozone summit the day before, heap renewed pressure on David Cameron as he struggles to keep the UK as far away from eurozone contagion as possible while still demanding a say in shaping the area's future.
On Thursday, Merkel once again dominated the stage as she agreed only that early agreement to boost the EU's bailout fund, the European financial stability facility, could help resolve the immediate crisis. Plans to boost the fund to €1tn (£860bn) will be discussed by Eurogroup finance ministers on Tuesday, but there is no evidence that global investors are at all interested.
The euro began to drop as soon as Sarkozy fell into line with Merkel – only hours after his foreign minister, Alain Juppé, had called for urgent intervention by the ECB to "play an essential role in restoring confidence".
"We're seeking a compromise. We do not agree on everything at first, but we'll end by agreeing," Juppé told French radio before the meeting began. In the event, Sarkozy insisted that the ECB's independence was untouchable – adding that political leaders would make "neither positive nor negative" demands on the central bank. Monti took a similar stance.
Merkel was so pleased about Sarkozy's about-turn she repeated three times that "the French president said he had confidence in the ECB and its independence".
She reiterated the view she expressed to the Bundestag a day earlier that eurobonds or the collectivisation of sovereign risk were neither "necessary nor appropriate" and could function only at a later stage of fiscal union.
"We don't want eurobonds because we don't want interest rates to rise dramatically in Germany," her economy minister and leader of the liberal FDP party, Philipp Rösler, had said earlier.
The trio, Merkel added, would "do everything to defend the euro" and insisted "we want a strong, stable euro", but the German chancellor repeated her mantra that this required strict actions by governments to abide by the rules of the stability and growth pact setting limits on budget deficits and national debt. These, she said, would include automatic sanctions against countries running excessive deficits.
David Scammell, a fund manager at Schroders, said the markets would be "disappointed" by the developments in Strasbourg. Scammell told the BBC that treaty changes would simply take too long, and that an immediate solution with real firepower would soon be needed to stem the crisis. "That means the ECB," he said.
Joshua Raymond, chief market strategist at City Index, agreed that the leaders had done little to boost confidence in the City: "Merkel's determination to prevent any implementation of a eurobond before proper fiscal integration of the euro area is seen – which could take years to achieve – sent markets in an afternoon tailspin."
There were already signs on Thursday that the crisis is entering a new phase, only a day after Germany failed to move all of a planned €6bn auction of 10-year bonds. Belgian bonds soared to 5.7%, Portugal's credit rating was notched down to junk status by Fitch, and an ECB governing council member said the downturn would be "significantly longer than we expected".
Gloom darkened over the area despite a 0.5% rise in German economic output in the third quarter, driven by consumer spending, and an unexpected rise in the November IFO-index of business confidence in the federal republic.
The only concrete decision to emerge from the mini-summit was that the three are to meet again soon in Rome to discuss further Monti's pledge for structural reforms to promote growth.
Fears of an imminent banking crisis are expected to intensify on Friday as inter-bank lending freezes over again, billions of euros are withdrawn from "Club Med" banks and the ECB is forced to lend more to struggling institutions. The central bank could reportedly extend the term of its loans to two or even three years.
UK borrowing costs fell below those of Germany briefly on Thursday as the yields on eurozone sovereign debt rose, the euro fell against the dollar and European equities suffered a ninth successive day of losses. Friday is expected to be no different.
Angela Merkel again ruled out any expanded role for the ECB and stamped down proposals for single, eurozone-wide "eurobonds" to share the risk of sovereign debt. The ECB, she said, was only responsible for monetary policy.
At a news conference in Strasbourg, the French president, Nicolas Sarkozy, and the new Italian prime minister, Mario Monti, fell meekly into line, with Sarkozy dropping French demands for urgent and expansive intervention by the ECB.
He and Merkel instead pointed to forthcoming plans for (unspecified) European Union treaty changes to advance a (distant) fiscal union in the eurozone. The Franco-German allies, who represent the traditional engine of EU integration, plan to set out their proposals before an EU summit on 9 December.
Their plans, which could be endorsed at an unscheduled eurozone summit the day before, heap renewed pressure on David Cameron as he struggles to keep the UK as far away from eurozone contagion as possible while still demanding a say in shaping the area's future.
On Thursday, Merkel once again dominated the stage as she agreed only that early agreement to boost the EU's bailout fund, the European financial stability facility, could help resolve the immediate crisis. Plans to boost the fund to €1tn (£860bn) will be discussed by Eurogroup finance ministers on Tuesday, but there is no evidence that global investors are at all interested.
The euro began to drop as soon as Sarkozy fell into line with Merkel – only hours after his foreign minister, Alain Juppé, had called for urgent intervention by the ECB to "play an essential role in restoring confidence".
"We're seeking a compromise. We do not agree on everything at first, but we'll end by agreeing," Juppé told French radio before the meeting began. In the event, Sarkozy insisted that the ECB's independence was untouchable – adding that political leaders would make "neither positive nor negative" demands on the central bank. Monti took a similar stance.
Merkel was so pleased about Sarkozy's about-turn she repeated three times that "the French president said he had confidence in the ECB and its independence".
She reiterated the view she expressed to the Bundestag a day earlier that eurobonds or the collectivisation of sovereign risk were neither "necessary nor appropriate" and could function only at a later stage of fiscal union.
"We don't want eurobonds because we don't want interest rates to rise dramatically in Germany," her economy minister and leader of the liberal FDP party, Philipp Rösler, had said earlier.
The trio, Merkel added, would "do everything to defend the euro" and insisted "we want a strong, stable euro", but the German chancellor repeated her mantra that this required strict actions by governments to abide by the rules of the stability and growth pact setting limits on budget deficits and national debt. These, she said, would include automatic sanctions against countries running excessive deficits.
David Scammell, a fund manager at Schroders, said the markets would be "disappointed" by the developments in Strasbourg. Scammell told the BBC that treaty changes would simply take too long, and that an immediate solution with real firepower would soon be needed to stem the crisis. "That means the ECB," he said.
Joshua Raymond, chief market strategist at City Index, agreed that the leaders had done little to boost confidence in the City: "Merkel's determination to prevent any implementation of a eurobond before proper fiscal integration of the euro area is seen – which could take years to achieve – sent markets in an afternoon tailspin."
There were already signs on Thursday that the crisis is entering a new phase, only a day after Germany failed to move all of a planned €6bn auction of 10-year bonds. Belgian bonds soared to 5.7%, Portugal's credit rating was notched down to junk status by Fitch, and an ECB governing council member said the downturn would be "significantly longer than we expected".
Gloom darkened over the area despite a 0.5% rise in German economic output in the third quarter, driven by consumer spending, and an unexpected rise in the November IFO-index of business confidence in the federal republic.
The only concrete decision to emerge from the mini-summit was that the three are to meet again soon in Rome to discuss further Monti's pledge for structural reforms to promote growth.
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