Germany, France propose reforms to EU treaties

Eurozone giants Germany and France promised to reform EU governing treaties on Thursday, but Chancellor Angela Merkel stood by her refusal to widen the European Central Bank's role. France had urged Berlin to allow the ECB to become a lender of last resort, with the firepower to protect debt-ridden eurozone members from falling victim to the bond markets, but the German leader stood firm at crisis talks. President Nicolas Sarkozy of France and Prime Minister Mario Monti of Italy stood by her side at a news conference in Strasbourg as she repeated her line, which some observers and traders have warned could threaten eurozone survival. All three leaders vowed to work together and stand by the euro but markets were unimpressed. French stocks fell into the red on the news, and Italy's bond yields surged back past the unsustainable seven percent threshold. "The French president has just underlined that the European Central Bank is independent," Merkel told reporters in the eastern French city. "So the eventual modifications to the treaties will not concern the duties of the ECB, which concern monetary policy and monetary stability," she added. With a tight smile, Sarkozy agreed that: "All three of us said that with respect for the independence of this institution, one should refrain from positive or negative demands of the ECB." Earlier, however, Sarkozy's senior ministers had made it clear that Paris was pushing for a change in the ECB's role, which Berlin insists must remain limited to controlling inflation and not bailing-out insolvent states. "It is urgent," Foreign Minister Alain Juppe said. "The situation is serious. We must not underestimate its gravity." France's minister for European affairs, Jean Leonetti, explained: "France eventually wants the European Central Bank to have the same role as the Federal Reserve in the United States. What's going on is very abnormal.  "Why is the euro under attack? It's simple. In the United States there's a Federal Reserve. Europe has the European Central Bank, but the European Central Bank does not buy up sovereign debt if needed," he argued. Germany, while holding out firmly against such an expansion of the ECB's role, is calling for changes to European treaties to enforce greater budget discipline on its heavily indebted partners. Sarkozy said that he and Merkel would work on a package of reforms in coming days, and present it to the Union as a whole at a December 9 summit. Some EU allies warn that treaty changes will take too long and might prove politically impossible to enact if hard-pressed voters suffering austerity programmes or eurosceptic governments like Britain's reject them. In an open letter to Merkel published in the German daily Handelsblatt, Luxembourg's Foreign Minister Jean Asselborn said: "If you, dear chancellor, do get your wish ... please do not forget the risk that the EU will implode. "Do I need to remind you that Spain and Luxembourg were the only countries in 2005 to vote 'yes' to the EU's constitutional treaty?" he asked. Monti also came under scrutiny in Strasbourg, with eurozone countries anxious to ensure he implements promised reforms to shore up the Italian economy and halt the spread of the crisis. He reaffirmed his promise to balance the Italian budget by 2013, and both Merkel and Sarkozy said they supported him. France has been scrambling to retain its top AAA credit rating, which is also vital to the EU debt rescue fund called the EFSF. Merkel is firmly opposed to freeing the ECB up to monetise eurozone debt, fearing this would undermine its limited inflation-busting mandate, and observers say it would take a catastrophe to change her mind. But Germany's own position was exposed as weaker than thought by its failure on Wednesday to find takers for two billion euros' worth of 10-year bonds, a rebuff from the markets to Europe's strongest economy. German bonds are the gold standard of eurozone debt but Berlin managed to draw bids of only 3.9 billion euros for a six-billion-euro auction, indicating investors are now sceptical about even the safest European assets. "Slowly but surely, the myth of German economic invincibility is starting to be questioned," said Sony Kapoor of Brussels economic think tank Re-Define. "Unless something drastic is done in the next few weeks, the trickle of sovereign and bank downgrades will soon turn into a flood," added. "France and Italy have their backs against the wall. Given the existential threat to the eurozone, so does Germany, it just does not know it yet." Analysts told AFP that only a sharply deeper crisis -- such as a situation in which Spain and Italy could no longer refinance their debt through private bond markets -- could conceivably change Berlin's mind. "Unfortunately, we are in the paradoxical situation where we are pinning all our hopes on a new catastrophe for Berlin finally to move," said Christian Schulz, an economist at Berenberg Bank.