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EU's Juncker, Germany clash over euro zone bonds

BERLIN/LONDON (Reuters) - Bickering among European Union leaders escalated on Wednesday over a proposal for joint euro zone bonds to overcome the bloc’s debt crisis, with Germany saying it opposed the idea on legal and economic grounds.

A large euro sign installation is seen in front of the European Central bank in Frankfurt, November 4, 2010. REUTERS/Kai Pfaffenbach

The chairman of finance ministers of the 16-nation single currency area, Jean-Claude Juncker, criticized German leaders for dismissing his suggestion for “E-bonds” to deter speculation against euro zone countries without examining it properly.

“The proposal is being rejected before it has been studied,” Juncker was quoted as saying in an interview with the newspaper Die Zeit. “Germany’s thinking is a bit simple on that.”

That drew an unusually sharp rebuke from German Chancellor Angela Merkel’s spokesman, who told a news conference: “In general it certainly doesn’t help anyone in Europe when the individual players in Europe call each other ‘un-European’.

“This talking against and about each other should stop. The markets are taking due note of this disunity.

Merkel herself said issuing common euro bonds would set the wrong incentives for member states, which needed the discipline of bond markets to run responsible budget policies. Asked about Juncker’s criticism, she said: “We should work calmly and focus. That is my contribution.

Berlin fears common euro zone bonds would raise its own borrowing costs, the lowest in the euro area.

Yields on German government bonds, normally seen as a safe haven by investors, rose as deepening uncertainty over how to stem the euro zone crisis hit even Europe’s strongest economy.

The yield on the 10-year German Bund, the benchmark for all euro zone debt, topped 3 percent for the first time in seven months, partly due to a sell-off in U.S. Treasuries but also due to anxiety over policy differences in the European Union.

Germany and France are pushing for an EU summit next week to approve a proposed treaty change that would allow debt-stricken euro zone states to make an orderly default, with private sector bondholders sharing losses on a case-by-case basis.

But euro zone finance ministers did not agree on any new action this week to stem the crisis, fuelling bond market doubts about whether the bloc can find a formula to halt contagion.

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The Bund yield has shot up from 2.4 percent in early November, while the borrowing costs of weaker euro zone economies -- Greece, Ireland, Portugal, Spain and Italy -- have also surged due to market jitters over default risks.

“In the absence of a rise in inflationary expectations, this increase is due entirely to market uncertainties over Germany’s own exposures to save the eurozone, and the size of fiscal transfers needed,” the Eurointelligence financial website said.

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Two euro zone countries -- Greece and Ireland -- have had to seek IMF/EU rescue packages of 110 billion euros and 85 billion euros respectively, tied to strict austerity conditions, after both were effectively shut out of capital markets.

Many analysts expect Portugal to need a bailout soon and some think Spain will also need help, although both governments insist they do not require aid.

The European Commission on Wednesday welcomed Ireland’s tough 2011 austerity budget, which received a first approval from parliament late on Tuesday, opening the way for international loans to start flowing to Dublin.

“It is a successful first step toward the implementation of the program that was agreed with the EU and the IMF,” Commission spokesman Amadeu Altafaj said in Brussels.

International Monetary Fund chief Dominique Strauss-Kahn, who on Tuesday criticized the EU’s slow, piecemeal response to the debt crisis, said on Wednesday the situation in Europe remained troubling and the future more uncertain than ever.

“The delay in strengthening supervision and creating effective crisis resolution mechanisms could well lead to the next crisis,” he told diplomats in Geneva.

Merkel has rejected two of the most widely discussed proposals for surmounting the crisis -- increasing the size of the euro zone’s financial safety net or issuing joint bonds to reduce weaker states’ borrowing costs.

Her spokesman Steffen Seibert said there were economic and legal hurdles to introducing such ‘E-bonds’, which would not be possible without fundamental changes to the EU’s Lisbon Treaty.

“Thus, the German government remains opposed to the proposal. The legal and economic concerns about the euro bonds will remain in place for the weeks ahead,” he added.

Juncker, who put forward the suggestion this week with Italian Economy Minister Giulio Tremonti, said he was not proposing a single interest rate to bundle all national debt on a European level. A large part of the debt would remain at national rates under the plan.

Some European Central Bank policymakers, while urging euro zone governments to toughen up budget rules and take stronger deficit-cutting measures, have advocated increasing the bloc’s rescue fund and voiced interest in the idea of common bonds.

But ECB governing council member Erkki Liikanen said on Wednesday the 440 billion euro European Financial Stability Facility was big enough and there was no need for a top-up.

“The actual sum that will be lent will probably stay at half of that,” he told a news conference in Helsinki.

Liikanen said the euro zone was still in a very fragile situation. High debt levels and weak competitiveness “have sapped the markets’ confidence in many countries’ ability to service their debts,” he said.

“When reforming the governance of economic policies, it is important that the EU and its member states are suitably ambitious,” Liikanen added.

Additional reporting by William James in London, Marcin Grajewski in Brussels, Erik Kirschbaum, Paul Carrel and Annike Breidthardt in Berlin, Terhi Kinnunen in Helsinki; writing by Paul Taylor, editing by Angus MacSwan

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