Germany is coming under mounting pressure to allow the European Central Bank to increase its capacity to buy bonds of the weaker European countries as European Union governments become increasingly frustrated about the ongoing sovereign debt crisis.
Although the ECB bought Italian and Spanish bonds for a short period following the EU summit in August, it is very unwilling to act as an effective buyer of last resort. Although most countries believe that giving the ECB a role in guaranteeing government debts would be enough to calm the markets, the German government, fearing that this would cause rapid inflation, remains opposed.
Italy has become the epicentre of the sovereign debt crisis in the eurozone as financial markets lurch towards creating a fresh recession. Although Greece has been the focal point of investor panic in the eurozone, with the long-term fate of the new unity government unclear following the collapse of George Papandreou’s government, Greece accounts for just 2 per cent of the eurozone economy and contingency plans exist in case of a sudden default.
With observers regarding 6 per cent as the highest level manageable for a government, the interest rate on 10-year Italian bonds reached 6.7 per cent this week.
At 120 per cent of gross domestic product, Italy has the second largest debt burden in the EU and needs to borrow 300 billion euros in 2012 to service its debts.
With traders now panicking that Italy will not be able to repay loans, investors are dumping their holdings, pushing the cost of Italy’s borrowing up and increasing the likelihood of default.
Meanwhile, European finance ministers remain divided on proposals to establish a financial transactions tax (FTT) following this week’s meeting in Brussels. Chancellor George Osborne
led opposition to the tax, arguing that
it would not be borne by the financial sector and would cost 500,000 jobs in Europe.
Although most EU countries remain supportive of the FTT on trades of shares, bonds and derivatives, opposition from a handful of countries including the Netherlands, Luxembourg, Sweden and the Czech Republic, as well as the United Kingdom, is hardening. The draft directive requires unanimous approval to be adopted.
Speaking in Brussels, Mr Osborne said: “There is not a single banker in this world who is going to pay this tax. The people who will pay this tax are pensioners, with pensions.”
However, German finance minister Wolfgang Schauble, who is leading calls for the FTT dismissed Osborne’s speech as “an excuse for doing nothing” adding pointedly that “we will wait 20 years before doing anything if we wait for the last island on this planet.”
The European Commission, which released draft legislation for an FTT last month, believes that the tax could raise 57 billion euros a year and be a way for the financial sector to pay its share of the costs from the financial crisis.
