Bloomberg News

Merkel Says EU Must Forge Closer Union to Convince Bondholders

November 15, 2011

(For more on Europe’s debt crisis, see EXT4.)

Nov. 13 (Bloomberg) -- German Chancellor Angela Merkel said it’s time to move toward closer political union in Europe to send a message to bondholders that euro-area leaders are serious about ending the sovereign debt crisis.

Speaking on the eve of her Christian Democratic Union party’s annual congress in the eastern German city of Leipzig, Merkel said she wants to preserve the euro with all current 17 members. “But that requires a fundamental change in our whole policy,” she said.

“I believe this is important for those who buy government bonds: that we make it clear that we want more Europe step by step, that is that the European Union, and the euro area in particular, grows together,” Merkel said today in an interview with ZDF television. “Otherwise people won’t believe that we can really get a handle on the problems.”

Merkel will address her party at about 11 a.m. tomorrow after weeks of crisis fighting during which she raised the prospect of ejecting Greece from the euro and joined with French President Nicolas Sarkozy to call on Italy to hold to its budget pledges. After leadership changes in both countries, the chancellor is turning her attention to shaping the EU’s future.

‘Sweeping Through’

“Big political changes are now sweeping through the euro zone, putting -- at least for now -- the many skeptical political observers to shame,” said Erik Nielsen, chief global economist at UniCredit SpA in London. “But will the market appreciate it?” he said. “I am not completely sure that it’ll get it quite yet.”

Bond yields in Italy soared to a euro-era record last week as political uncertainty in the euro region rocked financial markets globally. The euro rose from a one-month low of $1.3484 on Nov. 10 as Greece resolved a political impasse to close at $1.3750 on Nov. 11. The Stoxx Europe 600 index gained 2.4 percent, closing the week at the highest level in nine business days.

In her interview, Merkel said that the next step to bolster investor confidence means what was begun by the euro’s founders must be completed with “a fiscal union, and then turn it step by step into a political union.”

“That is the lesson of the crisis and this will still require a lot of effort,” she said.

December Summit

Euro leaders are due to meet again in Brussels on Dec. 9, when they have asked EU President Herman van Rompuy to present them with a report on a “timeframe for the further strengthening of the euro zone” that should include “the question of possible treaty changes,” the German Finance Ministry said Nov. 9.

“Merkel wants far more centralized euro fiscal oversight so that something like Greece can never happen again,” Jan Techau, director of the Brussels-based European center of the Carnegie Endowment for International Peace, said by phone. That means euro governments will have to cede some sovereignty over budgets, he said. “There seems to be some kind of deal between Merkel and Sarkozy on this.”

Michael Meister, the CDU’s parliamentary finance spokesman, raised the prospect of joint euro-area bonds following. “An integrated fiscal policy” in the euro region would mean “we can discuss the question of joint liability,” he said in an interview on Nov. 10. “The sequence of events is important.”

The euro crisis now entering its third year is the main theme occupying Germany’s ruling party as more than 1,000 delegates gather in Leipzig. The convention’s main motion is on the euro, and will be debated tomorrow.

Solidarity, Encouragement

Euro members that get financial support must reduce debt and strengthen their economies, according to the text of the motion. “Some countries will achieve this quickly, while others will need our solidarity and our encouragement for years,” it says.

The chancellor addresses the convention with domestic public opinion going her way. Merkel’s handling of the debt crisis is backed by 56 percent of Germans, up from 45 percent in early October, according to an FG Wahlen poll for ZDF television published Nov. 11. Merkel’s overall approval rating also rose. The Nov. 8-10 poll of 1,278 people has a margin of error of as much as 3 percentage points.

Merkel will use her speech to issue a “warning” that it’s necessary to do everything to move toward a “stability union,” the CDU’s Meister said. “We mustn’t just draft rules, we need to patrol them and enforce them,” he said. “We need more discipline.” Merkel will deliver that message “loud and clear.”

--Editors: Alan Crawford, John Simpson.

To contact the reporters on this story: Tony Czuczka in Leipzig via aczuczka@bloomberg.net; Brian Parkin in Leipzig via bparkin@bloomberg.net.

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


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