Will Germany open its arms to the call from new French leader Francois Hollande for growth supporting measures instead of pure austerity imposed by the Sarkozy-Merkel duo? That was the key question at the European Union summit held in Brussels last week.

Taking a decisive step in ramping up the European effort for containing for the ongoing debt crisis could not be expected. The issue of European Financial Stability Facility (EFSF), the €700 billion rescue fund of the Eurozone, was one of the questions addressed. The EFSF should be able to help recapitalize banks directly, rather than lend to individual countries that would lend to the banks subsequently.

Banks have become a center of the crisis as government bond yields are rising and the major creditors of the states, banks and other financial institutions, are mounting losses deprived from revaluation of their bond portfolios.

European equity markets were making heavy losses on the day of the summit, as the threat of Greece leaving the Eurozone peaks following indecisive early parliamentary elections from May 6. Now the extreme left is likely to be empowered in Greece after the upcoming round of early parliamentary elections prepared for June 17, this despite investors and tourist friendly wording its leaders use while communicating with Europe, uncertainty and a “Risk off” attitude of the market players prevails.

The major question of the European summit was Euro bonds. This is what new French President Hollande has put into the spotlight. Hollande is going to be the major form-shaping figure in Europe after conservative Sarkozy disappeared from the top political scene in Europe and German Chancellor Merkel keeps struggling in her homeland.

picture: Jean-Marc Ayrault

Hollande’s position is likely to be more diplomatic, as grasping the real political power is not equal to campaigning slogans and the stability of the Eurozone traditionally remains key policy for the French from all spectrums of the political scene. “Everything will be on the table” Hollande proclaimed. And that means pressing on long-refusing Merkel to rethink her reluctant attitude to Eurobonds.

Taking into account the bloodiness of the historical hyper inflation experience in Germany following World War I, Germany is not likely to give up its position easily.

First, Germany is a European economic powerhouse. Without Germany growing, Europe as whole would have been pushed into a deeper recession. The economic dynamics of Germany is what keeps Europe going forward.

Second, it will probably take a much steeper and severe fall on equities and possible riots in streets for Germans to feel pushed into the corner of the Eurobond issuance.

Third, Eurobond issue gets everyone involved as close to the state of the European fiscal union as ever. This would result in a United State of the Eurozone, which would be hard nut for all politicians in Europe to crack.

What we could certainly expect though wass the call for European growth, with German presence underlined by united austerity. No matter that the call for the state-driven economic growth will finally end up in further debt increase. Debt that has been at the center of the current crisis seemingly remains the source of the vicious cycle ahead. Because the Eurobond is just another form of the debt, no matter whether the debtor will be an individual, a company a state or supranational.

To contact the author of the story please e-mail mario.blascak@wbponline.com