Monti recruits for an Italian artillery

Mario Monti's advocacy of a 'bazooka' for Europe has drawn return fire from Germany, but as Spain fast approaches crisis point Italy is determined to convert other countries to its plan.

Overnight Mario Monti became the second Italian in a week to infuriate the Germans after he voiced his support for rolling out the 'bazooka' to put an end to Europe’s debt woes.

At a news conference in Finland, Monti was asked whether he believed the eurozone’s new bailout fund should receive a banking licence, which would allow it to borrow unlimited amounts of money from the European Central Bank. "I think this will help. I think this will in due course occur”, he replied.

Monti was visiting Finnish Prime Minister Jyrki Katainen as part of his campaign to drum up European support for a plan to have the eurozone’s bailout fund and the ECB buy up Italian and Spanish debt in order to drive the borrowing costs of the two countries lower. The Italian prime minister met with French President Franois Hollande in Paris on Tuesday, and is now heading off to Madrid where he will hold a working breakfast with his Spanish counterpart, Mariano Rajoy.

In an obvious snub to Berlin, Monti also voiced his support for ECB boss Mario Draghi, who last week pledged to do whatever was necessary to preserve the euro. These comments, Monti said, were "bold and appropriate”.

But Berlin fired back, with the boss of the powerful Bundesbank boss Jens Weidmann arguing that the ECB’s independence depends on it not overstepping its mandate, and warning policymakers not to "over-estimate the central bank’s possibilities”.

In an interview published on the bank’s website, Weidmann also argued that the Bundesbank had a greater say than other European central banks because it was "the largest and most important central bank in the euro system.”

Weidmann’s comments come ahead of an important ECB board meeting later today, where the bank is expected to consider a new strategy new round of bond buying in order to stop Spanish and Italian borrowing costs from rising further.

Even though Draghi’s comments last week gave both countries a temporary respite, alarm bells are again ringing over Spain as capital outflows from the country accelerate.

According to figures released by the Spanish central bank this week, capital outflows more than quadrupled in May to €41.3 billion ($US50.7 billion) compared to a year earlier, as Spanish households and businesses sent their savings abroad and as foreign investors dumped Spanish assets. In the first five months of this year, Spain suffered a record capital outflow of €163 billion, compared with the net inflow of €14.6 billion Spain received in the same period last year.

But even though Spain is fast approaching crisis point, the Bundesbank remains adamantly opposed to having the ECB resume its bond-buying program. It’s also staunchly opposed the idea of giving the eurozone’s bailout fund a banking licence – the 'bazooka approach' which is now being pushed by Hollande and Monti.

The French and Italian leaders worry that Italy and Spain are now caught in a vicious trap. Investors, worried about the hefty debt burdens and deteriorating economic outlooks of the two countries, are demanding ever higher interest rates. But this increases the debt-servicing costs of the two countries, making it even harder for them to reach their ambitious deficit reduction goals.

The two leaders are deeply concerned that the eurozone’s new bailout fund will only have around €750 billion in funding, well short of the €1 trillion or so that will be needed if Spain and Italy require bailouts.

They argue that the only way to convince investors that the eurozone is serious about ending its debt crisis is to grant the bailout fund a banking licence, endowing it with unlimited firepower. The bailout fund would be able to use any Spanish and Italian bonds it buys as collateral with the ECB, allowing it to raise fresh funding, and buy even more Italian and Spanish bonds. Speculators, daunted by the tremendous display of force from the bailout funds, would drop away, and Italian and Spanish interest rates would tumble.

But Hollande and Monti know that they will only win their battle if they can enlist the support of countries such as Finland – which is one of only four remaining triple-A countries in the eurozone, and which has traditionally supported Germany in taking a tough stand on bailouts.

And although Finland’s Katainen diplomatically supported Monti overnight – arguing that financial markets were not giving countries such as Italy the credit they deserved for this efforts in cleaning up their balance sheet – he remained sceptical of the benefits of having the eurozone bailout fund buying Italian and Spanish bonds, and maintained a stony silence on the 'bazooka' issue.

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