Bloomberg News

Merkel May Be Persuaded on Euro Debt-Sharing Compromise

May 25, 2012

The talks took place after Chancellor Angela Merkel clashed with fellow
European Union leaders at the Brussels summit over her refusal to consider euro bonds. Photographer: Jock Fistick/Bloomberg

The talks took place after Chancellor Angela Merkel clashed with fellow European Union leaders at the Brussels summit over her refusal to consider euro bonds. Photographer: Jock Fistick/Bloomberg

Chancellor Angela Merkel left the door open to a compromise on debt sharing in the euro area as Italian Prime Minister Mario Monti said he can help bring Germany around to acting in Europe’s “common good.”

Merkel’s veto on allowing Germany to underwrite joint debt issuance in the 17-nation euro region is under fire from her international partners as well as the domestic opposition. While she refused to back joint euro-area bonds at a Brussels summit on May 23, Germany’s opposition parties wrung a concession from the chancellor on her return to Berlin yesterday to reconsider a separate proposal on common liability for sovereign debt.

The blueprint, published in November by Merkel’s council of economic advisers, involves a so-called European redemption fund that would help governments scale back outstanding debt to below 60 percent of economic output in return for constitutional commitments on economic reform. The government and opposition agreed to study the fund and discuss it further on June 13.

“The concept amounts to a third way to tackle the euro area’s debt mountain,” Peter Bofinger, a professor of economics at the University of Wuerzburg and one of the proposed fund’s architects, said today by phone. “Euro bonds have a dreadful press and are evidently unacceptable to Germany. What’s overlooked by the fund’s critics is that it is temporary and has built-in inducements on states to run sound budgets. I don’t know right now whether the concept will be adopted, but it deserves earnest consideration.”

Euro, Stocks

Stocks fluctuated as the euro rose from a 22-month low against the dollar. The Stoxx 600 (SX7P) Index dropped 0.1 percent to 241.75 as of 1:42 p.m. in Berlin, after earlier rising as much as 0.8 percent. The euro was up 0.3 percent at $1.2572.

Merkel called the Berlin meeting in a bid to secure passage of Europe’s budget enforcement treaty and associated legislation setting up the permanent rescue fund before parliament’s summer recess on July 6. She needs to assuage opposition anger over her austerity-first stance during the debt crisis to win the two- thirds majority needed to pass the bills in both houses of parliament.

The talks took place after Merkel clashed with fellow European Union leaders at the Brussels summit over her refusal to consider euro bonds. Merkel was in the minority in rejecting them, according to Monti.

‘Anything Can Happen’

“Europe can have euro bonds soon,” Monti said in an interview on Italian television station La7 yesterday. Germany has an economic interest in ensuring no country leaves the euro, while Greece will probably remain in the currency region even as “anything can happen,” he said.

“A united Europe is in Germany’s interest,” Monti said. “We’ll have euro bonds if the euro area, and therefore Germany, will want them.”

Monti’s account of the meeting contrasted with that of Luxembourg Prime Minister Jean-Claude Juncker, who told reporters in Brussels that joint debt sales “didn’t find much support,” particularly in the German-speaking area, while the French-speaking area was more enthusiastic.

Back in Berlin 15 hours later, Merkel’s coalition and the opposition Social Democrats and Greens agreed that euro bonds “are not up for discussion,” Volker Kauder, the floor leader of Merkel’s Christian Democratic Union, told reporters. At the same time, the two sides agreed to “exchange studies” on the redemption fund before next month’s meeting.

The government has “legal reservations” about whether joint liability for national debts “is in line with European treaties” and is examining the matter, Merkel’s chief spokesman, Steffen Seibert, said today.

Gold Reserves

The fund, backed by euro member states’ gold reserves, would be worth 2.3 trillion euros ($2.9 trillion). Under the system, participating countries would be able to transfer debt exceeding the 60 percent threshold into the fund for which participating member countries are “jointly and severally liable,” according to the council’s paper. Limited to 25 years, it would be accompanied by a pledge by states to anchor debt limits in their constitutions and commit to economic reforms.

Michael Meister, the CDU’s deputy floor leader, said in an interview that joint liability “runs counter to European law” and Germany’s constitution.

“European treaties as well as the constitution would have to be changed, and I don’t see a chance for either,” he said.

Public opinion is with the government. Seventy-nine percent of Germans back Merkel’s rejection of euro bonds, with little difference between government and opposition supporters, a Feb. 22-24 FG Wahlen poll for ZDF television showed today.

No Big Bang

Merkel, who poured cold water on the redemption fund when it was unveiled last year, again doused joint debt liability in a speech yesterday, saying that the causes of the debt crisis “can’t be redressed with one big bang.”

“This means very hard work for Europe,” Merkel told an electrical industry conference in Berlin. “It makes no sense to paper over everything with euro bonds or other instruments that ostensibly show solidarity, only to find Europe in even more difficult straits than we are in today.”

Sigmar Gabriel, chairman of the main opposition Social Democrats, told reporters after yesterday’s meeting with the Merkel that he had the impression “the government’s blockade on growth has been broken.” Even so, thus far the government is “being extremely reticent” with regard to the redemption fund proposal, “even if they’re not rejecting it.”

Whatever the fund’s merits, Merkel needs the fiscal pact to pass in parliament, Jan Techau, director of the European Center of the Carnegie Endowment for International Peace in Brussels, said by phone. If she wavers, “it would be political suicide and the markets would go crazy.”

To contact the reporters on this story: Jeffrey Donovan in Rome at jdonovan26@bloomberg.net; Brian Parkin in Berlin at bparkin@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net; James Hertling at jhertling@bloomberg.net


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