Osborne risks the wrath of Merkel

Posted on June 12, 2012

A Greek exit from the eurozone may be the price that has to be paid to persuade Germany to save the single currency, George Osborne, said on Tuesday.

As Spanish borrowing costs hit a euro-era high, the chancellor suggested the German public might only be prepared to bail out other struggling eurozone economies if Greece went overboard.

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    His commentary from the sidelines of the crisis will inflame European tensions ahead of Sunday’s Greek general election, which will determine whether Athens will swallow the austerity measures needed to sustain its euro membership.

    “I ultimately don’t know whether Greece needs to leave the euro in order for the eurozone to do the things necessary to make their currency survive,” Mr Osborne said at a business event organised by the Times newspaper.

    “I just don’t know whether the German government requires Greek exit to explain to their public why they need to do certain things like a banking union, eurobonds and things in common with that.”

    Mr Osborne also risked infuriating European partners by criticising last weekend’s “depressing” decision to recapitalise Spanish banks with €100bn via the government in Madrid, rather than through a direct injection of capital.

    “If you do it via the Spanish sovereign, then you are not going to convince the market the Spanish sovereign is entirely credible… and yet they went ahead down this route,” he said.

    The yield on Spanish benchmark 10-year debt on Tuesday hit 6.8 per cent. The move was accompanied by rising bond yields in countries deemed less risky, such as Germany and the UK, where market interest rates have been at record lows.

    “The crisis is deteriorating at an ever-increasing pace,” said Mark Schofield, a senior strategist at Citigroup. “Investors are increasingly pricing in either of the two tail risks – full eurozone break-up or fiscal union.”

    Officials have insisted the EU has sufficient short-term mechanisms to deal with the crisis in the form of rescue funds, while the debate over longer term measures has shifted towards fiscal co-ordination and Europe-wide banking supervision.

    Angela Merkel, German chancellor, spoke out in support of European banking regulation, although she stopped short of backing a region-wide resolution scheme, which Berlin fears could burden the country with joint liability for others’ debts.

    “Germany – and I can say this for the whole country – is prepared to do more on integration but we cannot get involved in things which I am convinced will lead to an even bigger disaster than the situation we are in today,” she said.

    Vítor Constâncio, the vice-president of the European ­Central Bank, weighed into the debate over a proposed banking union, arguing that the ECB should take charge of supervising the eurozone’s top banks.

    The comments underscored ECB policy makers’ determination to drive forward a banking union – despite scepticism by Germany’s Bundesbank and the risk of damaging turf wars with other EU institutions.

    Since its launch in 1998, the ECB’s main task has been controlling inflation. But Mr Constâncio said EU treaties already included provisions for giving it supervisory responsibilities.

    He confirmed there was no formal ECB position yet.

    Supervisory powers for the ECB have also been backed by Christian Noyer, France’s central bank governor. Britain also favours using the ECB to oversee a banking union.

    German policymakers fear that expanding the ECB’s tasks could weaken its control over inflation and just hours earlier, Andreas Dombret, a Bundesbank executive, had said proposals for a banking union “appear to be premature”. Separately Sabine Lautenschläger, the Bundesbank vice-president, told a Frankfurt conference that a banking union had to be preceded by fiscal union.

    A banking union should become “an integral counterpart” of monetary union, the the ECB argued in its financial stability review, published on Tuesday, which identified a “potential aggravation” of sovereign debt crisis as a “key risk” to the block’s financial stability.

    The ECB saw EU banks shrinking balance sheets by €1.5 trillion, mainly via asset sales, by the end of 2013 – although that was less than estimated by the International Monetary Fund. The report did not consider the risks of a possible Greek exit from the eurozone, which Mr Constâncio said would be “virtually impossible to assess”.

    Reporting by George Parker and Robin Wigglesworth in London and Ralph Atkins and James Wilson in Frankfurt

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