The galling sound of French silence

As Germany holds strong on demands for a fiscal union, and borrowing costs in Italy and Spain continue to spiral upwards, France is remaining mute on the subject of tighter unity.

Europe’s raging debt crisis deteriorated further overnight, with the borrowing costs of Italy and Spain climbing ever higher, while Berlin and Paris remain at odds over how to stem the crisis.

Overnight, Spanish 10-year bonds yields hit a euro-era high of 6.8 per cent, as investors worried that the latest €100 billion ($US125 billion) Spanish bank bailout merely adds to the country’s debt burden. They’re also deeply concerned that the bailout money could rank ahead of private sector bondholders in terms of repayment.

Meanwhile, the yield on Italian 10-year bonds jumped to 6.2 per cent, as investors worried whether the country will be able to service its massive €1.9 trillion debt burden, as its economy slides deeper into recession.

In the face of this escalating crisis, calls for eurozone to set up a ‘banking union’ – which would beef up the supervision of the region’s biggest banks, and introduce a deposit guarantee for European banks – are intensifying.

French Finance Minister Pierre Moscovici overnight hailed the €100 billion Spanish bank bailout as the first step towards a banking union for the eurozone, while Vtor Constncio, vice-president of the European Central Bank, argued that the ECB should take charge of supervising the eurozone’s major banks.

But although German Chancellor Angela Merkel is in favour of improving the supervision of European banks, she is wary of supporting a banking union because she fears it will leave Germany saddled with the cost of bailing out the region’s banks.

Berlin argues that eurobonds and a banking union can only work if there is a closer fiscal union, which would require eurozone countries to cede more budgetary control.

"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,” Merkel said overnight.

Her stance was backed by the Bundesbank’s vice-president Sabine Lautenschlger who told a banking conference that "whoever is footing the bill must also have a right of control, particularly when it comes to the large sums that are seen in banking crises".

But although Paris is strenuously in favour of Berlin providing more support for the eurozone – whether through a banking union, or through eurobonds – it maintains an obdurate silence when it comes to the subject of a closer fiscal union.

During the French presidential campaign the topic was assiduously avoided by both Franois Hollande and Nicolas Sarkozy. Nor has Hollande shown much interest in discussing the matter since his victory. No doubt he remembers all too clearly the traumatic split in the French left, and the victory of the "no” vote in the 2005 referendum on adopting a constitution for the eurozone.

However, many believe his position is reflected in the appointment of two partisans of the "no” vote to key political posts – Laurent Fabius as foreign affairs minister, and Bernard Cazeneuve in charge of European affairs.

Meanwhile, the eurozone’s debt crisis is likely to continue to worsen, with Merkel continuing to rebuff Hollande’s suggestions for solving the crisis until he agrees to discuss her idea of a fiscal union.

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