Merkel's Red Line
Merkel has so far strictly opposed euro bonds, arguing that the prospect of fresh debt at affordable interest rates for all members would remove an incentive for countries to maintain budget discipline. The bonds could also increase German borrowing costs, which are far lower than for most other euro member states because German debt is seen as particularly safe and is therefore in high demand.
Hollande pledged during his election campaign to challenge Merkel's austerity-led plan for rescuing the euro and to place greater emphasis on stimulating growth. The Socialist Party leader said he wanted to renegotiate the fiscal pact, which was agreed to by 25 out of the 27 E.U. leaders earlier this year and which enshrines lasting budget discipline.
At their first meeting in Berlin last Tuesday, Chancellor Merkel and President Hollande said they would resolve their differences in time for a regular E.U. summit at the end of June, and pledged to keep alive the Franco-German alliance seen as crucial for progress in the E.U.
The G-8 summit came up with a vaguely worded declaration that papered over their differences. The leaders said growth should be balanced with debt reduction and they "welcomed" the European debate about measures to enhance growth.
Hollande, seen as the champion of southern euro states whose economies are struggling under radical spending cuts, is now putting Merkel under pressure by building an alliance in favor of euro bonds.
Berlin Hoping For Socialist Victory In French Parliamentary Elections
France will also push for a greater role for the European Central Bank in managing the debt crisis. The new French prime minister, Jean-Marc Ayrault, reiterated a proposal President Hollande had made during the election campaign -- to allow the European Central Bank to lend directly to governments.
The ECB has so far rejected such calls because its statutes prohibit it from direct government financing. The idea, like euro bonds, is a red line for the German government.
Merkel doesn't expect to reach an agreement with Hollande on euro strategy before the French parliamentary elections on June 10 and 17, Spiegel has learned. Compromises are only likely ahead of the E.U. summit at the end of June, said sources in Merkel's Chancellery.
The sources added that even though Merkel backed Nicolas Sarkozy in the campaign, the German government is now hoping that Hollande's Socialists will win the June elections. If Hollande were confronted by a conservative majority in the French parliament, Franco-German cooperation would be even more complicated than it is already, said the sources.
Intellpuke: This article is a compilation of reporting by Spiegel journalists and various news agencies; you can read it in context here: www.spiegel.de/international/europe/french-president-fran-ois-hollande-to-call-for-euro-bonds-at-eu-summit-a-834180.html