Merkel rejects sharing eurozone debt through bonds

Francois Hollande and Angela Merkel in Paris, 27 June
Image caption Francois Hollande and Angela Merkel have differing views on debt management

German Chancellor Angela Merkel has again rejected the idea of pooling eurozone debt through bonds and urged greater competitiveness in the EU.

She told parliament in Berlin that the proposal for "eurobonds" went against Germany's constitution.

Mrs Merkel later travelled to Paris for talks with President Francois Hollande.

In a gesture to Mr Hollande, who holds opposing views on debt, she said she hoped European leaders would adopt a 130bn-euro ($162bn) stimulus package.

Mr Hollande, who became French president on a ticket of anti-austerity, has been a strong supporter of the growth package.

Mrs Merkel said: "We have made progress toward a pact for growth, which we hope can be decided tomorrow."

The pair head to Brussels on Thursday for a two-day summit of European Union leaders regarded as crucial in tackling a growing economic crisis.

European authorities have unveiled proposals such as the creation of a European treasury, which would have powers over national budgets.

The 10-year plan is designed to strengthen the eurozone and prevent future crises, but critics say it will not address current debt problems.

Spanish Prime Minister Mariano Rajoy said on Wednesday that his country could not afford to finance itself for long at current bond rates.

Spanish 10-year government bonds have been trading at yields above 6.8%, coming close to the 7% considered unaffordable.

'Vicious circle'

Several EU leaders want individual countries' debts guaranteed by the whole eurozone, for instance in the form of centrally issued eurobonds.

Image caption Protesters parked a mannequin of Angela Merkel outside her offices in Berlin

But Mrs Merkel told parliament that eurobonds were "the wrong way" and "counter-productive", adding: "We are working to breach the vicious circle of piling up debt and breaking [EU] rules."

She said to loud applause: "It is imperative that we don't promise things that we cannot deliver. Joint liability can only happen when sufficient controls are in place."

Stronger competitiveness was the condition for sustained growth, the chancellor said.

Mr Hollande believes eurobonds should be a eurozone priority for helping countries like Italy and Spain bring their borrowing costs down.

But Mrs Merkel continues to insist that before anything is done to increase the burden on German taxpayers, building blocks towards greater fiscal, banking and, eventually, political union must be put in place.

Calls for more immediate action are growing louder by the day, the BBC's Chris Morris says.

The fear is that the markets will react very badly to another fudged summit, he adds.