PARIS (Reuters) - There are weeks when it can sound as if the European sovereign debt crisis is going round in circles.
Barbed exchanges between Italian Prime Minister Mario Monti and German Chancellor Angela Merkel carry echoes of a prolonged dialogue of the deaf between Greece and Germany two years ago when Berlin was resisting calls to bail out Athens.
Then as now, a debt-stricken government pushing through spending cuts, tax rises and economic reforms pleaded for lower interest rates and stronger European (read German) support to convince citizens the pain is worthwhile.
Now as then, a chancellor constrained by public hostility to bailouts and convinced only market pressure can keep profligate nations on a path of righteousness is turning a deaf ear, saying there is no need to act since no one is requesting aid.
The delay in acting to help Greece in early 2010 undermined financial market confidence in the 17-nation single European currency, which has still not been wholly restored, and raised the cost of the eventual rescue.
But it’s not all deja vu, because Germany has far more confidence in Monti’s Italy than it ever had in Greece.
As a result, EU officials expect Merkel to relent and agree to a bigger European financial firewall in March once euro zone leaders have signed two key treaties sought by Berlin on budget discipline and the rules of a permanent rescue fund.
In the meantime, Italians fretting about tax rises and public spending cuts can draw some consolation from their country’s declining borrowing costs on the bond market despite Standard & Poor’s double-notch downgrade of Italy’s credit rating to BBB+ on Jan 13.
“The problem is that despite these sacrifices, we do not see any concessions from the EU, such as in the form of lower interest rates,” Monti complained to the German newspaper Die Welt on the eve of a visit to Berlin earlier this month.
If there was no tangible reward for their efforts, Italians could turn against Europe and against Germany, “seen as the leader of EU intolerance,” he warned.
He has also voiced support for common euro zone bonds as a longer-term solution, which is anathema to Merkel.
In the short-term, Monti wants Berlin to increase the size of the euro zone’s rescue fund for countries shut out of capital markets. The more money is pledged to the fund, he said, the less likely it is to have to spend a single euro.
That drew a gruff response from the chancellery.
“I am still searching for what more Germany should do for other euro zone countries,” Merkel said when asked if Berlin should show more solidarity after S&P cut the credit ratings of Italy and eight other euro zone states.
Government spokesmen ruled out raising the German contribution to the rescue fund.
In public, Merkel has expressed admiration for Monti’s bold pension and business reforms, and the Italian leader has lauded Germany’s social market economy as a model for all of Europe.
Privately, German and Italian officials are sometimes less complimentary about each other.
While they respect Monti, the Germans are quick to recall that his predecessor, Silvio Berlusconi, went back on promised deficit reduction steps as soon as the European Central Bank stepped in to rescue Rome last August by buying its bonds.
Italy could apply for the European Financial Stability Facility to buy or insure its new bonds. But some in Berlin say Rome wants to avoid the stigma and the strict conditions and intrusive supervision that would come with such assistance.
In German eyes, it seems perverse to press for a bigger firewall when the money in the existing temporary rescue fund is not being tapped. Increasing the amount available might only whet the market’s appetite for more.
Besides, it would be difficult to get Merkel’s centre-right coalition to approve another increase in parliament after she repeatedly promised lawmakers last year that Germany’s total liability would be pegged at 211 billion euros.
The Italians voice private frustration at perceived German intransigence and question Merkel’s pursuit of the fiscal pact to enforce stricter budget discipline in the euro zone when bond markets are more concerned to see a stronger financial backstop.
The German leader’s insistence that European help for countries in difficulty must only be a “last resort” means the political will in Berlin to agree to additional measures tends to evaporate each time the markets are calm for a weak or two, an Italian diplomat said.
Unlike French President Nicolas Sarkozy, who has argued that the European Central Bank should act as a lender of last resort to underpin the euro zone, Monti shares the German view of the treaty limits on the ECB’s role.
His focus on strengthening the EU rescue fund shows a keen sense of what is politically feasible in Germany.
European officials expect Berlin will eventually allow the two rescue funds — the temporary European Financial Stability Facility and the permanent European Stability Mechanism — to run in parallel from July for an extended period.
That would provide a combined capacity of nearly 1 trillion euros, even if the EFSF has to live with a AA+ rather than a triple-A credit rating after some of its key guarantors, especially France, were downgraded.
Such a move might convince the world’s major economies in the G20 that the euro zone is doing more to rescue itself, and hence enable the International Monetary Fund to increase its fire-fighting capacity by the requested $600 billion.
So the public sparring between Monti and Merkel may turn out to have been more of a safety valve to assuage public pressure on both sides of the euro zone divide until such a deal emerges than a venting of profound differences.
Writing by Paul Taylor; Editing by Alison Birrane