Merkel Hardens Position

The EU summit is a day away and pre-summit bickering is so intense that it will be difficult if not impossible to get any major agreements.

Two days ago, in a speech in German parliament, Bloomberg reported Merkel Hardens Resistance to Euro-Area Debt Sharing

Chancellor Angela Merkel hardened her resistance to euro-area debt sharing to resolve the region's financial crisis, setting Germany on a collision course with its allies at a summit of European leaders this week.

Merkel, speaking to a conference in Berlin today as Spain announced it would formally seek aid for its banks, dismissed "euro bonds, euro bills and European deposit insurance with joint liability and much more" as "economically wrong and counterproductive," saying that they ran against the German constitution.

"It's not a bold prediction to say that in Brussels most eyes -- all eyes -- will be on Germany yet again," Merkel said. "I say quite openly: when I think of the summit on Thursday I'm concerned that once again the discussion will be far too much about all kinds of ideas for joint liability and far too little about improved oversight and structural measures."

"There must not be an imbalance between liability and control," she said today. "For instance, we would do a European deposit insurance immediately if it doesn't lead to common liability but to improved oversight possibilities and standards."

Monti Lashes out at Germany

In response his own falling support as much as his displeasure with Merkel, Monti lashes out at Germany ahead of summit

Italy's technocratic prime minister's frustration with Germany surfaced in a combative speech to parliament, saying he would not go to Brussels to "rubber-stamp" pre-written documents and was ready to extend the two-day summit until Sunday night if needed to reach agreements before markets reopen on Monday.

Speculation over the fate of his government has become so feverish in Rome that officials were forced to deny that the prime minister had threatened to resign if he were to leave Brussels without success.

Singling out Jens Weidmann by name, Mr Monti said the Bundesbank president had "badly misunderstood" his proposal to deploy eurozone rescue funds to bring down the borrowing costs of countries such as Italy and Spain that had honoured obligations to implement reforms and bring down their budget deficits.

Italy on Tuesday was forced to borrow at 4.71 per cent for two-year bills, its highest level since December, and will face a testing auction on Thursday of up to €5.5bn in five and 10-year bonds.

Italian officials said they were extremely concerned how markets might react Monday if the Brussels talks fail to break new ground. The summit was heading towards "complete uncertainty", Mr Monti said.

Mr Monti is said by aides to be furious with Mr Berlusconi's recent anti-European tack which is seen as undermining Italy ahead of the summit. Mr Berlusconi reportedly repeated on Tuesday that it would not be a bad thing if Germany exited from the euro.

Explaining Italian Politics

Reader Andrea who is from Italy but now lives in France, has some observations and comments on Italian politics in response to Monti Threatens to Resign if No Eurobonds; Specter of Early Elections

Hi Mish,

I have a few comments on your article.

First: Former prime minister Silvio Berlusconi made a third call for a euro exit, this time asking Germany to exit if the ECB will not print.

Berlusconi has a certain ability in "feeling" what people wants to hear and use it as his message. In my opinion he is testing the public opinion. I expect he will run polls to check if his anti-euro stance is allowing his party to increase consensus. In this case, I strongly believe that he will raise the level of his anti-euro stance given he has nothing to lose as his party is in freefall.

Second: Monti's days are indeed numbered because he will step down at the end of legislature (spring 2013) and he will not seek for renewal of his mandate in the new one.

However, his term could be even shorter. There could be early elections before the natural term.

In the Italian constitution, the President of the Republic appoints the prime minister, but the appointment must get Parliamentary approval. If a PM resigns or loses majority approval, a search is on to find another person. If parliament cannot find a coalition leader with sufficient votes, the only choice left is to call early elections.

Berlusconi's PDL party has the numbers to make Monti step down and to not allow any new majority. He may do just that.

Berlusconi is increasingly uncomfortable in supporting Monti. So are others. Government bond yields are back at very high levels and now Monti is losing popular support. Backing Monti has cost PDL to lose a lot of votes.

However, with early elections, a dangerous competitor like Beppe Grillo's Movimento 5 Stelle (Five Star Movement) will not have enough time to present candidates everywhere. Thus, Berlusconi might also use a poor EU summit as reason to withdraw support to Monti, given the side benefit of holding elections before the Five Star Movement grows stronger.

Third: the most likely outcome of the next election in Italy is a deadlock, assuming recent polls are accurate.

The reason is the electoral law. The current electoral law gives additional representatives and senators to the "coalition" that scores first. Coalition is the key term. Even if Grillo's Five Star Movement wins as a party, he will be politically isolated whereas the center-left can form a coalition.

However, additional share is given on national basis for the Chamber of Representatives and on regional basis for the Senate. For this reason, the Senate will most likely be fragmented with no majority at all. To govern, you need majority on both.

What would happen then? Very hard to guess.

Best regards,

Andrea

For more on the Five Star Movement and Beppe Grillo's plan to dump the euro, please see ....

• Italy "Gasping Like Beached Whale"; Berlusconi Reiterates Euro Exit "Not Blasphemy"; Beppe Grillo Discusses "Taboo of the Euro"
• Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement.
• Monti Begs Germany to Stabilize Interest Rates; Merkel Pours Cold Water On "Theoretical Discussions"; Italy Official Denial #1; Why Monti's Days Are Numbered.