Virginia Mayo, Associated Press
BRUSSELS — Germany and the European Union's executive arm clashed openly on the need to issue common bonds uniting the 17 euro nations, in another sign that Europe is as divided as ever in dealing with its deepening debt crisis.
As German Chancellor Angela Merkel railed against the proposals from the European Commission in Brussels, her country itself showed a rare moment of weakness when it suffered what many in the jittery markets described as a failed bond auction. And European economic indicators dashed almost any hope that the 17-country eurozone will be able to stave off a recession as confidence continues to sink.
But instead of presenting a united front in the face of adversity, the rift between Berlin and the EU's headquarters only widened.
Commission President Jose Manuel Barroso argued that eurobonds "could bring tremendous benefits" by blending the risk and security of the common currency zone into one pool.
The idea of uniting profligate nations like Greece with fiscally orthodox countries like Germany has not met with much enthusiasm in Berlin, and Merkel, aware that such a proposal was coming, preemptively rejected it 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."
Germany has opposed the use of eurobonds and has long called on fiscally wayward 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.
Barroso shot back that it was bad form to kill off a debate before it even started.
"Frankly speaking, I don't think it is appropriate in our EU .... to say from the beginning that the debate should not be held," Barroso told reporters in a blunt retort. "We are trying to have a rational, reasonable, serious — intellectually and politically serious — debate."
Key to Barroso's proposals was the need for stricter budgetary discipline to go hand in hand with a united effort to contain the biggest financial challenge in the half-century history of the European Union.
"It is quite clear, as things stand at present, if we want to keep a common currency, we need more integrated governance," Barroso said.
He wants the countries using the euro currency to work more closely together to dovetail their budgetary policies and avoid having one nation endanger all others by not living by its financial commitments. The crisis, which started in Greece nearly two years ago, has now spread to much bigger economies such as Italy and Spain and there was a hint Wednesday that not even Germany is immune.
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. Germany's Financial Agency said its latest €6 billion ($8.1 billion) auction of 10-year bonds met with only 60 percent demand. It blamed "the extraordinarily nervous market environment" for the weak demand.
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.
Barroso conceded that eurobonds, or so-called stability bonds, "will not solve our immediate problems" and could only be effectively deployed once the situation has calmed. 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."
Merkel appeared to win some support from Portuguese Prime Minister Pedro Passos Coelho, whose country has taken a €78 billion ($106 billion) bailout. He said the proposals offer neither a short- nor a medium-term solution to Europe's financial problems.
"The current instability cannot wait for a long, uncertain and unpredictable process to conclude," he told reporters in Lisbon.
The Commission also came forward with proposals it believes can be pushed through without a time-consuming treaty change, including a strengthening of current budget rules and increased monitoring of member states.
Don Melvin in Brussels, Juergen Baetz in Berlin and Barry Hatton in Lisbon contributed to this report.
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