Bloomberg News

Merkel Cabinet Approves ESM, Seeks to Avert Fiscal Pact Delay

May 16, 2012

German Chancellor Angela Merkel’s Cabinet today approved bills to allow the setting up of Europe’s permanent bailout fund while considering how to gain parliament’s backing for the twinned fiscal pact.

Merkel wants to push the legislation through parliament at the same time to bolster the euro and send a signal that budget discipline in the single currency area will be tightened as money is earmarked to set up the fund. The opposition Social Democrats, whose votes are needed to pass the bills in both chambers, oppose the fiscal pact in its current form and are demanding it include more economic stimulus measures.

Finance Minister Wolfgang Schaeuble today played down the potential delay in approving the fiscal pact, saying that there’s still enough time before the summer recess in July to pass the bill.

“If the Social Democrats, if the opposition need a few weeks more to discuss the bill that’s no problem,” he said today on DeutschlandRadio.

SPD misgivings over the pact highlight pressure Merkel faces within Germany as well as from her international partners to adopt a more flexible approach in tackling the debt crisis. To become law, both the fund, called the European Stability Mechanism, and the fiscal pact need a two-thirds majority in both chambers of Germany’s parliament, the Bundestag and the Bundesrat. That forces Merkel to court opposition support.

ESM July Deadline

The SPD is focusing criticism on the pact while signaling readiness to back Merkel on the ESM. Leaders in the currency bloc plan to kick-start the ESM’s operation by July 1. The SPD- led upper house, representing Germany’s 16 states, said on its website that it welcomes the move to set up the fund.

However, leading Social Democrats said this week they doubt Germany will ratify the pact before September. European Union leaders including Merkel and Luxemburg’s Prime Minister Jean- Claude Juncker have urged the 25 signatories of the fiscal pact treaty not to delay its ratification.

The SPD ties backing for the compact in parliament to Merkel agreeing to economic stimulus measures like those backed by French President Francois Hollande, said SPD Chairman Sigmar Gabriel in Berlin yesterday.

Germany’s upper house also wants clarity from the European Commission on the impact of the compact on regional budgets, the states said on the upper-house website on May 11.

The Bundesrat expects that the commission’s interpretation of the compact “won’t lead to additional demands” on the states, it stated. Germany’s budget “debt brake” rules set 2020 as the deadline for the states to balance their budgets while the compact stipulates a “medium-term” target from 2013.

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Patrick Donahue in Berlin at pdonahue1@bloomberg.net

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


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