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European Union

More political integration - but how?

At a meeting in Rome, France, Spain, Germany and Italy all said they wanted more political integration in Europe. How to achieve that appears to be an open, unanswered question.

High above the Tiber River in Rome lies the Villa Madama, an appropriately named 16th-century palazzo, if you are a leader of Italy, Spain and France and are hoping to curry favor with German Chancellor Angela Merkel.

The palace was built by the powerful Medici family, once known for its intrigue and hardball politics. For years it has served as the guesthouse of the Italian foreign ministry.

This time around, the European cloverleaf of French President Francois Hollande, the prime ministers of Spain and Italy, Mariano Rajoy and Mario Monti, and Chancellor Merkel were holed up to discuss the fate of the mushrooming euro crisis.

The host declared that results were needed - at the very latest in time for the big EU summit at the end of next week. Otherwise, they risked further attacks against the eurozone by financial markets.

Irreversible euro

And so Merkel and her three compatriots told their joint press conference that they wanted to send a signal that there was no going back on th euro.

"We are doing everything to give the euro a future. We are fighting for the euro," said Merkel. The French president spoke of a medium-term vision. Spain's Rajoy said a road map would be presented for more solidarity and a closer economic union, including a banking union.

Mariano Rajoy, Francois Hollande, Angela Merkel and Mario Monti

Spanish Prime Minister Mariano Rajoy, French President Francois Hollande, German Chancellor Angela Merkel and Italien Prime Minister Mario Monti

Mario Monti's great concern was the enormously high interest rate, his country and Spain had to offer for government bonds. The mood at Friday's talks between the four key eurozone states was rather cool and reserved. The German chancellor made polite and admiring remarks about the beautiful Villa Madama, but otherwise remained unyielding. The purchase of government bonds by the eurozone rescue fund was not imminent, she said prior to the meeting. She emphasized again and again that mutual liability could only come together with joint control. "That is why we are working on a political union. Europe must close ranks," she said.

Italy doesn't want help

German Finance Minister Wolfgang Schäuble said earlier in the day at a meeting with colleagues in Luxembourg that anyone who wanted bond purchases through the EFSF rescue fund would have to officially apply for them. But that is something that Mario Monti, who is under increasing domestic pressure, wants to avoid at all costs. Italy does not want to be associated with the odor of bankruptcy and become easy prey for financial markets. "Italy won't need any help," Monti told several newspapers shortly before the four met in Rome. "And if we ever need help, then something is wrong with the system," he added. He also said that countries, like Italy, that reduce their deficits according to plan, must not be punished with abnormally high interest rates.

And in fact, since taking office, Monti has cut back Italy's new debt. Even so, there are few buyers for Italian bonds because the economy is not growing and the promised reforms have been slow in having the desired effect. In Spain, Prime Minister Rajoy has avoided help from the EFSF, since aid from the rescue fund would come with tough conditions and controls.

Spanish euro coin

Spanish banks need EU money

For Spain's struggling banks, however, he will have to apply for funding. The amount required is estimated to be about 60 billion euros ($75 billion) at the moment. So far, no application has been made, and the hesitation, said members from the other delegations in Rome, is unsettling the markets. Monti, an economics professor, has no real interest in remaining prime minister, but until elections - in early 2013 at the latest - he intends to continue fighting.

No short-term solution?

Mario Monti had not only called for visions for the mid-term future but also for more immediate measures. As such, he counts the buying of government bonds of countries in financial peril as well as the beefing up of the rescue funds and the creation of a banking union. And he wants all of the eurozone states to be jointly liable for all the eurozone citizens' savings.

At the Rome talks, German Chancellor Merkel did not signal she'd be willing to accept those measures. They all would in the end lead to higher risks for the better-off eurozone members. Referring to the aid for Spanish banks, Merkel explained that "it is not that I don't want to help them." But she pointed out that liability would have to be coupled with control. That, she said, she had to insist on for the sake of the taxpayers in Germany and other EU states. That's why according to Berlin, it is the Spanish state that will have to shoulder the liability.

Euobonds remain uncertain

Monti, Spanish Prime Minister Rajoy and French President Hollande were little surprised that Germany was not willing to sanction the introduction of so-called eurobonds - bonds issued by the eurozone with joint liability by all member states. Such bonds would mean that the other states could profit from the extremely low interest that Germany currently pays on its government bonds.

But Germany argues that common liability and eurobonds would only ever be an option if budget control were also managed jointly. That means only after a political union. "Eurobonds are at the end of that development," Merkel doesn't tire to stress.

Growth package on the way

French President Francois Hollande wants the EU summit next week to agree on his central election promise - a growth package for Europe to complement the austerity measures. Merkel has signaled agreement to the package which however does not include any real new measures. Classic stimulus measures paid for by increasing government debt are however not planned.

Euro bills

Merkel still rejects eurobonds

What the Rome talks did agree on was to raise the resources of the European Investment Bank. The four leaders want to mobilize some 130 billion euros to boost growth. All four also stood behind the plans for a financial transactions tax in order to make the financial markets share part of the burden of fixing the crisis. As other EU states reject such a tax, Italy, France, Spain and Germany want to introduce it at least in the single currency eurozone - "As soon as possible," according to Hollande.

Franco-German tandem is stuttering

Franco-German teamwork has become more difficult since conservative Nicolas Sarkozy was replaced by socialist Francoise Hollande. "Agreements between Germany and France on EU matters is still necessary," Italian host Mario Monti said, "But that alone is no longer enough." That's why he had invited the two to Rome. Then, Spain's Rajoy joined them as well. Monti said he didn't want to include more countries as then the talks would have turned into a proper EU summit. But Monti cautioned that the quartet should not be seen as somehow in rivalry to the normal EU summits. "This was just for coordination and preparation."

Protests against 'La Merkel'

While there was a cool breeze around the Villa Madama, the heat was on in the center of Rome. On the Piazza Venezia, hundreds of demonstrators gathered to protests against Merkel. They accused the German Chancellor of insisting on austerity that was crippling economic recovery. But they saw little of the chancellor - after the talks she immediately went off to the airport to fly to Gdansk to make it in time for Germany's EURO 2012 quarterfinal against Greece.

Author: Bernd Riegert /ai
Editor: Richard Connor

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