Germany defiant as Europe suffers

Yields on 10-year Spanish bonds rose briefly to 5.6pc on Wednesday.

Bond traders say the country may have trouble raising funds until it becomes clear whether the European Central Bank will buy Spanish debt.

In continued tension across the eurozone periphery, rioters in Athens set fire to cars and beat a former minister with clubs outside the parliament building.

The violence follows ugly scenes in Rome the day before when protests over education cuts erupted into street battles, leaving 100 injured in Italy’s worst riots for 30 years.

One police officer was nearly dragged to his death. Italy’s press said urban guerrillas had infiltrated the protest, prompting fears of a return to the 1970s terrorism of Left and Right.

More peacefully, Ireland’s Dail approved the country’s €85bn rescue deal by six votes but anger is building over the terms. Investors fear that the next government will repudiate the deal after fresh elections.

Michael Noonan, finance chief of opposition Fine Gael, said Ireland should walk away from the senior debt of rescued banks.

“You have the obscene situation where the poorest of the poor, through their taxes and welfare cuts, are being asked to guarantee the speculation of investors in hedge funds. Ireland has no moral or legal obligation to cover this debt,” he said.

Brian Lenihan, the finance minister, accused Fine Gael of playing with fire. “Those who think we can unilaterally renege on senior bondholders against the wishes of the ECB are living in fantasy land,” he said.

In Berlin, the Merkel government so far shows no sign of wanting to play the good European.

Foreign minister Guido Westerwelle issued a veiled threat that Germany may walk away from the project if the rest of the EU tries to bounce the country into a debt union. “Anyone who talks about entering a union of financial transfers is putting support for Europe at risk, especially in the countries that must bear most of the burden,” he said.

Germany’s political elite is bitterly divided about how to handle EU demands.

Social Democrat leader Frank-Walter Steinmeier accused Mrs Merkel of a “pathetic abdication” of her duties.

“This is no answer to the deepest European crisis in my lifetime,” he told the Bundestag.

He said Europe must lance the boil once and for all. “Greece, Ireland and Portugal urgently need to be released from a substantial part of their debt. Painful spending cuts ... will not allow them to escape their debt trap.

“We must also ensure that solvent member states, such as Spain and Italy, are not drawn into the downward spiral of financial speculation. We must guarantee the entire outstanding eurozone debt of stable countries,” he wrote.

Germany’s opposition has just committed itself to a policy that would saddle the country with up to €4 trillion of fresh liabilities, a repeat of German reunification on a much bigger scale. This is a radical departure.

Mr Steinmeier’s proposal is a gamble that Spain (or Italy) would never need to draw such support. It assumes that Spain is fundamentally solvent. This is a hotly disputed subject.

Former Chancellor Helmut Schmidt said Germany must give up much of its sovereignty to the EU and accept the burden of costly “reparations” if it is to save the euro and avoid pushing southern Europe “into the abyss”. He said Germany had caused “horrors in the past” and had a special duty to uphold the European ideal. Petty-minded “tacticalists” who seem willing to let the EU fall apart will leave a catastrophic historical legacy, he said.

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