No to eurobonds

German Chancellor Angela Merkel used a session of parliament on Wednesday to set out her center-right government's position on how to tackle problems facing the eurozone, ahead of a key European Union summit on Thursday and Friday in Brussels.

One of the focal points of the meeting is to be how to handle possible future debt crises in eurozone countries, such as the ones currently facing Greece and Ireland. Merkel insisted that no European country would be left behind should it face similar dire financial straits.

"No one in Europe will be left alone, no one in Europe will be abandoned," Merkel said. "Europe succeeds when it acts together and, I would add, Europe succeeds only when it acts together."

Merkel accused of mishandling the situation

The debate about the EU summit revealed a split in the German parliament over the issue of how to handle Europe. Following Merkel’s speech, the opposition Social Democratic Party, the Greens and the Left party distanced themselves from Merkel’s strategy.

The head of the Social Democratic Party bloc, Frank-Walter Steinmeier said the government was sending out unclear signals, and that Merkel’s hesitance had put Germany’s commitment to European solidarity in doubt.

Merkel also came under attack from the head of the Left party, Gesine Loetzsch. She said the chancellor was rushing from one disaster to the next, whilst trying to give the impression that the situation was under control.

"What we need now is investment in the future of Europe," Loetzsch said.

Crisis-proof euro

After being forced to help bail out Greece earlier this year, the European Union created a financial rescue fund to be triggered in case of any future debt crisis. Ireland became the first country to access the fund last month.

Some believe that the 750 billion euros ($997 billion) in the bailout fund won't be enough - particularly if financially troubled countries like Spain or Portugal are also forced to dip into it in the near future. According to some analysts, this could, in turn, threaten the eurozone itself, but Chancellor Merkel played down concerns about the eurozone's common currency.

"It is undeniable that some eurozone countries face difficult challenges but it is also undeniable that the euro has shown itself to be crisis-proof," she said.

Spain causes market wobbles

As if to illustrate the concerns about the potential for further bailouts, ratings agency Moody’s warned Spain on Wednesday that its debt could be downgraded. The euro slid in reaction to the news, while the borrowing costs of Spain and Portugal rose slightly. The ratings agency Standard and Poor’s made a similar warning to Belgium on Tuesday.

Analysts have questioned whether the current fund would be sufficient to bailout Spain, the eurozone's fourth largest economy.

Moody's said it was concerned about Spain's high debt funding needs, its heavily indebted banks and its regional finances, but it did not expect Madrid would have to follow Greece and Ireland in seeking an EU bailout.

The Portuguese government announced moves to cut red tape and boost growth, and said it would soon adopt quarterly fiscal targets, part of a broad effort to convince EU officials and financial markets it does not need a bailout.

European Commission President Jose Manuel Barroso urged leaders to act fast to reach a consensus at the summit.

Germany pledges support for ECB

Meanwhile, The European Central Bank (ECB) is expected to ask euro zone member states for more capital, a move to lower its leverage as it helps tackle the debt crisis.

That issue may be discussed among EU leaders on Thursday, when they will be joined for dinner by ECB President Jean-Claude Trichet. The ECB has come under pressure to step up its bond-buying program to help the likes of Ireland, Greece and Portugal.

Germany said it would support giving the ECB more capital, with an official saying the move would show financial markets that the central bank had the firepower to buy new government bonds if needed.

No support for European bonds

Jean-Claude Juncker, prime minister of Luxembourg and the chairman of the group of eurozone finance ministers recently floated the idea of a common European bond to help relieve pressure on weaker members of the eurozone.

Merkel has been staunchly opposed to this proposal and reiterated her resistance again on Wednesday.

She said that what she described as a "collectivization of risk" among eurozone nations would be a mistake.

Germany fears that if adopted, eurobonds would significantly raise its borrowing costs, which are currently among the lowest in Europe.

A report published in the Frankfurter Allgemeine Zeitung on Monday estimated the cost for Germany of a common eurozone bond to be at least 17 billion euros annually.

Author: Matt Zuvela, Joanna Impey (AFP, AP, Reuters)
Editor: Chuck Penfold