Germany vies with EU on eurobond issue

The European Commission backed the idea of eurobonds Wednesday, even after influential member Germany came out staunchly opposed to the latest proposal for Europe's debt crisis.

EU Commission President Jose Manuel Barroso said Wednesday that the 17 countries using the euro currency needed to work more closely together to dovetail their budgetary policies.

Barroso, who heads the executive arm of the European Union, said there was a need to "embrace deeper integration for the euro area" and that "implemented in the right way, the joint issuance of debt in the euro area could bring tremendous benefits."

In effect, Barroso was advocating for the creation of a eurobond, a debt instrument that would be backed by the European Central Bank. Such a bond would be comparable in size and scope to the benchmark U.S. Treasury bill or T-bill.

That would even more firmly ally strong economies like Germany to the balance sheets of weaker ones such as Greece.

Germany has opposed the use of eurobonds and has long called on profligate member states to clean up their own houses with as little outside intervention as possible. A big worry for Germany is that its low borrowing costs would get diluted if eurobonds came into issue and it would then be forced to pay higher rates to tap bond markets.

Anticipating the proposal, Chancellor Angela Merkel poured cold water on the idea in the German Parliament earlier in the day.

"It is extremely troubling, I might say inappropriate, that the Commission is now focusing on proposals on eurobonds in different varieties," she told legislators.

Merkel argued that it was a pretense to suggest that a "collectivization of the debt would allow us to overcome the currency union's structural flaws."

While Merkel was voicing her opposition to the idea of eurobonds, Germany suffered what many in the markets are describing as a failed bond auction.

Despite being touted as the European bedrock of financial stability and rigor, Germany failed to raise as much money as it hoped in its latest bond auction, in a sign that even it may not be immune from the debt crisis raging across the continent.

Germany's Financial Agency said its latest 6 billion euro($8.1 billion US) auction of 10-year bonds met with only 60 per cent demand. It blamed "the extraordinarily nervous market environment" for the weak demand.

The crisis, which started in Greece nearly two years ago, has now spread to much-bigger economies such as Italy and Spain.A closely watched manufacturing index showed the eurozone's economyhas been contracting for the last three months.

Six consecutive months of contraction is the technical definition of a recession.

Since Greece pushed the eurozone into its ever-worsening financial mess last year, many member states have seen their cost of government borrowing rise to record levels. Germany's borrowing rates though have dropped sharply as investors buy up its bonds as a safe haven.

That Germany had trouble raising a comparatively small figure like $6 billion does not bode well for the debt-laden nations of Portugal, Ireland, Italy, Greece and Spain, who have a combined $115 billion worth of debt due between now and the end of the year.

Germany has long been reluctant to bail out other euro nations, insisting it was up to their governments to live by sound economic principles and win investor confidence.

Barroso said that eurobonds, or so-called stability bonds, "will not solve our immediate problems."

Still he said "stability bonds are examples of reinforced governance, of a strong will to live together in the euro area and a good example of discipline."

Speaking to reporters before question period in Ottawa, Finance Minister Jim Flaherty again urged the European economies to work together to get their fiscal houses in order.

"We need the eurozone members to make sure those countries that need to consolidate their deficit situations do so and they follow through," Flaherty said. "[If not] we'll have continuing disorderly markets, big spreads with respect to bonds, and a continuing lack of market confidence. This is obviously not good for the eurozone countries but it's also not good for the rest of the world."