During a press conference earlier today, French President Nicolas Sarkozy and German Chancellor Angela Merkel attempted to patch up a public rift stemming from an incident last week. The two leaders also used the session to express confidence in newly-appointed Italian Prime Minister Mario Monti.
As the heads of the two largest members of the Eurozone, Merkel and Sarkozy have made a great effort to present a united front while tackling the debt crisis. This is why markets were so surprised when the two leaders were so clearly at odds last week over the latitude with which the ECB could operate in the sovereign bond markets.
French officials actively lobbied for the ECB to invest heavily in government bonds in order to ensure sufficient liquidity and to keep yields lower. Germany, on the other hand, argued that under European Union rules, the ECB did not have the mandate to buy the debt of individual nations. Merkel harkened this to acting as a de facto “lender of last resort” for nations struggling with higher yields on their bonds.
Given events earlier this week that saw French bond yields rise amidst warnings that France could lose its triple A rating, there is little chance that French officials will abandon their efforts to see the ECB intervene. Indeed, Sarkozy left the press conference stating that “propositions for the modification of treaties” would be offered within the next few days.
Further details on the proposals were not offered other than Merkel insisting that the proposals did not directly impact the ECB. Meanwhile, Germany received its own yield scare this week which has increased concerns the very future of the Eurozone could be in jeopardy.
Scott Boyd is a currency analyst and a regular contributor to the OANDA MarketPulse FX blog.