Italy's Monti squeezed between Merkel and Sarkozy

Italy’s new Prime Minister Mario Monti could find himself trying to bridge the positions of French President Nicolas Sarkozy and German Chancellor Angela Merkel, when he meets them in Strasbourg for debt crisis talks on Thursday.

Reuters/Charles Platiau

The euro fell heavily on Wednesday after poor sales of German bonds, leading some investors to worry whether Germany deserved its reputation as the safe-haven within the eurozone.

But Germany remains firmly opposed to what many see as the only action which might calm the markets – allowing the European Central Bank to buy the bonds of fiscally weak euro member states.

Berlin insists that to do so would discourage profligate countries from restructuring their economies.

Germany is also psychologically averse to allowing the European Central Bank to intervene.

It wants the ECB to prevent inflation above all, after being scarred by its experience between the wars when the German central bank printed unlimited amounts of money, resulting in hyperinflation and ultimately the rise of Nazism.

France has long favoured a more energetic role for the Central Bank and on Thursday Foreign Minister Alain Juppé said that the ECB should play an “essential role” in resolving the eurozone debt crisis.

Its hard to see how both sides will find a compromise, following Angela Merkel’s strident performance in parliament on Wednesday, when she said: “The economic and monetary union is based on a central bank which has as its sole responsibility the maintaining of price stability”, adding that she believed its mandate should “not, absolutely not” be changed.

Italy's new prime minister Mario Monti, a one-time EU Competition Commissioner and former consultant at investment bank Goldman Sachs, will find himself caught in the middle, as he begins to impose austerity measures in one of the eurozone's most damaged economies.