Germany unmoved by French pleas for more ECB action

Angela Merkel was unmoved by another roller-coaster day that saw Portuguese debt being downgraded to junk status, Italian bond yields pushed into the bail-out zone, and doubts cast over France's AAA rating: the German Chancellor refused to allow the ECB to become Europe's lender of last resort.

Ms Merkel instead used a three-way summit with France and Italy in Strasbourg to insist that new treaty powers to intervene and punish sinner states remained the key focus of Europe's rescue efforts. She said: "The countries who don't keep to the stability pact have to be punished – those who contravene it need to be penalised. We need to make sure this doesn't happen again."

Even suggestions that the ECB could extend longer loans to countries over a period of up to three years appeared to be ruled out. Ms Merkel said: "The ECB is independent, the modification of the treaty does not concern the ECB, which is dealing with monetary policy and financial stability. We are worried about a fiscal policy. It's a very different chapter. It has nothing to do with the European bank."

But at the start of the day, Jean Leonetti, French minister for European affairs, said: "France wants the ECB to have the same role as the Federal Reserve... Why is the euro under attack? It's simple. In the US there's a Federal Reserve. Europe has the ECB, but the ECB does not buy up sovereign debt if needed."

The calls were backed by Ettore Gotti Tedeschi, chairman of the Vatican bank, who also praised proposals to issue jointly guaranteed debt or eurobonds. Alistair Newton at Nomura said in a note: "The threat to the euro is greater now, in our view, than it has been at any time since the crisis started, with only the ECB now capable of averting a catastrophe."

After a clearly fractious meeting, Nicolas Sarkozy tried to crush the doubts Fitch cast over France's AAA rating on Wednesday. "[Fitch] said the AAA rating of France is stable - maybe that translation has not crossed the Rhine river," he said.

But after the summit, Mr Sarkozy had been forced into submission. "We all stated our confidence in the ECB and its leaders and stated that in respect of the independence of this essential institution we must refrain from making positive or negative demands of it," he said.

He added that proposals to change European treaties would be presented ahead of the EU summit on December 9. Italian premier Mario Monti pledged to balance the budget by 2013 - but failed to prevent the country's 10-year bonds closed in the danger zone again at 7.13pc.

As stock and bond markets lurched, there was bemusement about Germany's stance. Christian Schulz, an economist at Berenberg Bank, told reporters: "Unfortunately, we are in the paradoxical situation where we are pinning all our hopes on a new catastrophe for Berlin finally to move."

The Telegraph