CRISIS? WHAT crisis? As European leaders burned up the phone lines yesterday, their spokesmen dismissed expectations that financial market jitters had prompted them to hit the accelerator on euro zone rescue plans.
In the middle of Germany’s wettest summer in a century, German chancellor Angela Merkel led a charge of the wet blanket brigade yesterday, dampening expectations that leaders would add to last month’s summit conclusions, which promise further aid to Greece and a more muscular European Financial Stability Facility rescue fund.
The German leader instructed her officials to talk down the letter from European Commission president José Manuel Barroso calling for a stability facility funding boost, hoping the debate would simply go away.
But with financial markets hitting record lows, the German leader’s hopes for a quiet holiday high in the Dolomites began to fade. On Thursday evening she agreed to speak the next day to French president Nicolas Sarkozy, holidaying in the French Riviera.
Merkel wanted a discreet chat – to avoid pressure for any announcements – but her spokesman was forced, through gritted teeth, to confirm the arranged call after the news was leaked from the Élysée Palace.
Before the phone call with the man they have dubbed the “Euro Napoleon”, German officials dismissed claims leaders were engaged in a crisis conference call.
This is a summer drama, they insisted in Berlin, much ado about nothing, a flash of market instability with no basis in political or economic reality.
“We’re all puzzled about what’s up with the markets, to be honest,” said a finance ministry official. “The markets are just taking individual, national, political questions – on Italian reforms or the Spanish elections – and rolling them together into a bigger problem.”
Behind the scenes, though, officials were furious that Barroso’s talk had unsettled markets still further and might distract from pressure for Italy and Spain to announce further reforms. “I don’t think we could do anything for the euro zone now by hanging big sacks of money in the window,” said a chancellery official.
By lunchtime yesterday the true nature of the frenetic phone calls became clear: euro zone leaders were mounting a concerted effort to push Italian prime minister Silvio Berlusconi into announcing further reforms.
Two days after he insisted that it was business as usual, the Italian leader was forced into an about-face in Rome amid continued market worries over Italy’s financial and political stability. Now Berlusconi is expected to present new measures to open up tightly-regulated areas of Italy’s labour market as well as introduce a constitutional provision banning deficit spending.
Amid a loss of momentum in Italy’s key manufacturing and services industry, euro zone leaders hope such measures will give Italy’s economy a shot in the arm and calm markets.
But doubts linger that Berlusconi is the man to deliver on reforms.
“Italy’s current government doesn’t enjoy the trust and confidence outside the country that it will do what is necessary,” said Michael Meister, financial market spokesman of Germany’s ruling Christian Democrats.
“What needs to be done now has to take place on the domestic political stage in Italy and Spain. It cannot be achieved by calling into question the instruments agreed two weeks ago by EU leaders.”
Despite Berlin’s hopes it would go away, Barroso’s letter continued to cause ripples yesterday in Germany, one of half-a-dozen triple-A rated countries who would have to finance an expanded fund.
“It’s simply not acceptable,” said Wolfgang Gerke of the Bavarian Financial Centre. “It’s time to demand Barroso’s resignation for remarks that were basically a put position for traders.”
Frankfurt analysts said the mood among traders was one of subdued scepticism that a final euro zone solution was on the cards in the coming months.
“Instead of a solution politicians have continued their salami tactics, slicing off a bit at a time but not giving enough to calm things down,” said Commerzbank analyst You-Na Park. “We can see a greater scepticism among traders that they can expect anything at all.”
In Brussels, while EU commissioner for economic and monetary affairs Olli Rehn worked on damage limitation, analysts suggested Barroso’s letter was less about the euro zone crisis and more his own limited role in events.
“He feels he needs to get a share of the crisis management so now he’s getting on the rhetorical warpath,” said Jan Techau of Carnegie Europe in Brussels. “My feeling is he wants to correct the image that he is the one person sleepwalking through the crisis. It’s backbencher politics.”
