Bloomberg News

Merkel Ally Roesler Takes Insolvency Plan to Baroin in Paris

October 05, 2011

(See EXT4 for more on the European debt crisis.)

Oct. 5 (Bloomberg) -- German Economy Minister Philipp Roesler travels to Paris today to push his proposals to allow an insolvency in the euro area as soon as next year, a plan he says would avoid the market chaos that would follow a Greek default.

Roesler, the leader of Chancellor Angela Merkel’s Free Democratic Party coalition partner, is due to meet with Economy and Finance Minister Francois Baroin and Prime Minister Francois Fillon to “discuss his proposals for a European stability culture,” the German Economy Ministry said in an e-mail. His trip takes place four days before Merkel hosts French President Nicolas Sarkozy for talks in Berlin.

Roesler, who is also vice chancellor, goes to France armed with a plan to allow indebted euro-area economies to be declared insolvent under the post-2013 permanent rescue fund, while offering them a path back to economic health. His proposal seeks to balance calls within his party to let Greece default with his determination to hold to the FDP’s pro-European ideals and keep struggling euro members in the currency area.

“No one can say with certainty” what would happen if Greece defaults, Merkel told members of her Christian Democratic Union party late yesterday. A default would lead to speculative attacks on other highly indebted euro countries, trigger “a gigantic loss of confidence” in euro-area sovereign bonds and risk sending German economic growth into reverse, she said.

Merkel’s Leap

“Before I make a nifty step into an adventure, I have to ask whether we can really handle this and can we oversee what we are doing?” Merkel said.

Roesler’s proposal seeks to make what he calls resolvency a centerpiece of the permanent rescue fund, the European Stability Mechanism, which Finance Minister Wolfgang Schaeuble has said he would support being brought into force in mid-2012, a year earlier than planned.

Unlike the current rescue fund, ESM rules permit euro- region members to become insolvent. Resolvency acknowledges the precedent while offering those states help to return “to fitness and competitiveness,” Roesler said in a letter to the Finance Ministry distributed to news organizations yesterday. A resolvency could involve restructuring of debt.

The plan envisages setting up tools to establish insolvency and “avoiding political assessment” that can now influence the process. A “European Monetary Fund” would take over control of select fiscal and economic policy in an insolvent state, substituting powers that lie with sovereign governments. Other tools would include negotiating new terms with investors on bond repayments and selling member states’ assets.

Any mention of default may be unwelcome in France, whose banks are the most exposed to Greek debt. It’s also unclear what support Roesler’s plan enjoys from Merkel or Schaeuble, both of whom are Christian Democrats.

Norbert Barthle, the CDU’s ranking member on parliament’s budget committee, said that he backed Roesler proposals over those of his FDP colleagues who urge Greece to exit the euro.

It makes sense “to explore how we can, in constructing the future permanent rescue mechanism, keep any struggling euro region member states in the currency,” Barthle said by phone.

--With assistance from Tony Czuczka in Berlin. Editors: Alan Crawford, Eddie Buckle

To contact the reporter on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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