German Chancellor Angela Merkel returns to the front line of the European debt crisis this week as the bloc’s leaders squabble over measures including bond purchases to relieve concerns the single currency may fragment.

Merkel ends her summer vacation to oversee a Cabinet meeting Aug. 15 before departing for Canada and talks with Prime Minister Stephen Harper as the spiraling crisis threatens the global economy. With policy makers awaiting a German high court decision on bailout funding next month, they’re struggling to smooth divisions over a European Central Bank plan to buy the bonds of indebted nations.

“It makes no sense for the ECB to start financing” Spain and Italy, ECB Governing Council member Luc Coene said in an interview with Belgian newspapers De Tijd and L’Echo published on Aug. 11. “It would only lead to the ECB taking on the whole public debt of Spain and Italy onto its balance sheet.”

ECB President Mario Draghi said earlier this month the central bank could purchase sovereign debt alongside euro-area bailout funds. While the plan offered Europe an initial respite from the turmoil, Spanish and Italian yields climbed last week on concern that a debt-purchasing program won’t be sufficient to curb the crisis.

Concern over the euro may weigh on already flagging global growth, a prospect underscored today by waning growth in Japan’s economy.

“The chancellor is like everybody else returning from vacation ― you enjoy a different kind of rhythm while on vacation ― nevertheless she is returning to work very happily,” Steffen Seibert, Merkel’s chief spokesman, told reporters at a regular government press conference in Berlin today. “There will be a lot to do, a lot of energy, which you’ll see in the coming days and weeks.”

Italy’s 10-year bonds advanced, with the rate slipping 5 basis points to 5.84 percent as of 12:56 p.m. in Berlin, after it sold its maximum target at an auction of one-year bills. Yields on equivalent Spanish debt dropped 9 basis points to 6.79 percent.

The euro traded at $1.2339, up 0.4 percent.

While the ECB said that it would undertake bond purchases only if troubled nations promise measures to improve their economic health, Italy and Spain have yet to decide whether they will request help.

“To ensure that such interventions help to bring down bond yields in a lasting way, they will only be available for member states that pursue sound budgetary policies, adopt structural reforms for growth, and address macroeconomic imbalances,” European Economic and Monetary Affairs Commissioner Olli Rehn said in an op-ed published in the Wall Street Journal today, without specifying any nation by name. Those states face a “formidable challenge,” with “little breathing space to adopt the game-changing reforms that are essential for long-term gain.”

Coene, who also heads Belgium’s central bank, told the two newspapers that ECB officials are divided on what conditions should be agreed. The central bank’s experience a year ago demonstrates why the ECB is reluctant to step in, he said.

“We haven’t forgotten what happened in August of last year: We bought Italian bonds and right after that the Italian government reneged on its pledges,” Coene was quoted as saying. “The conclusion is clear: When you take away the market pressure, you take away the pressure on politicians to act.”

ECB purchases won’t return investor confidence in Spain and Italy, he said, attributing the rise in bond yields to a lack of trust in those countries to repair their economies. 

(Bloomberg)