The two countries have clashed over the plans to expand the EU rescue fund and the proposed plans for the European Central bank to purchase bonds from struggling member states.
The Germans have been opposed to the proposals from the outset with many politicians in the Bundestag angry with a number of the struggling single currency countries. They do not believe that Germany should foot the bill for bailing out countries that they believe got themselves into the mess they now find themselves in.
Italian Prime minister Mario Monti enraged many Germans following yesterday’s comments that governments should act under loosened parliamentary bonds. The unelected prime minister of Italy also raised some eyebrows by preaching about democracy as well as suggesting that the democratic process should be overridden in order to save the single currency. Members of the German Free democrat party accused Monti of playing with political fire by urging other governments to circumvent democratic legitimacy.
“We must make it clear to Mr Monti that we Germans will not shut down our democracy to pay Italian debts,” said Alexander Dobrindt, secretary-general of Bavaria’s Social Christians.
The Italian press hasn’t helped matters after the Il Giornale publishing a front page picture of Angela Merkel under the headline ‘Fourth Reich’. The Germans have taken the brunt of the abuse from the struggling nations who seem to believe that the Germans are responsible for their plight, an opinion far from shared by Germans themselves.
“The tone of the debate has turned dangerous. We must be careful that Europe does not rip itself apart,” said German foreign minister, Guido Westerwelle. He himself fanned the flames over the weekend, saying he was “categorically” against further expansion of the EU rescue machinery or bond purchases by the European Central Bank. “I can’t imagine that a majority of the Bundestag will back unlimited debt liabilities,” he said.
Hans Redeker, from Morgan Stanley, said Mrs Merkel has a clear interest in pushing Spain and Italy into rescues now before opponents are ready for elections. “We’re moving into a phase of ECB monetisation. No investor can afford to lose out on the sugar rush,” he said.
This latest argument could raise the risk that Germany will refuse to back the proposed measures altogether. Merkel herself does back the measures but she faces a tough challenge to convince members of her coalition government to agree.
The Euro has seen gains against a basket of currencies thanks to increased optimism in the Eurozone. Many investors are hoping that the ECB will again take action to assist Italy and Spain with their spiralling borrowing costs. The details of the ECB plans are not yet known for certain, but traders believe that the currency could make further gains as markets remain optimistic, that is if political squabbling doesn’t damage that confidence.
