Bloomberg News

Merkel Facing Campaign Asserts Euro Control Snubbing Joint Bonds

October 19, 2012

German Chancellor Angela Merkel reasserted control over the future shape of the euro zone, rebuffing a French-led bid for the setup of a joint treasury with independent borrowing powers.

Merkel blunted French President Francois Hollande’s appeal for more transfer payments from rich to poor countries along with common euro-area bond sales, demanding that a future central budget be confined to projects like job training.

“As long as there are individual national budgets, I regard the assumption of joint liability as inappropriate and from our point of view this isn’t up for debate,” Merkel, seeking a third term next year, told reporters after a European summit in Brussels yesterday.

Germany’s campaign colored the crisis-management summit, the 20th since February 2010. Hollande jabbed at Merkel, pressing her to overcome re-election demands to complete a deal on a banking union. The thought of elections influencing her European Union policy “never crossed my mind until I heard people talking about it here,” she said.

In the 19 hours between those two comments, the German leader checked Hollande’s attempt to ally with Italy and Spain to form a counterweight to Germany. The skirmishing preceded a November summit on the next seven-year EU budget and a December gathering that will map out the euro’s future architecture.

‘Fiscal Capacity’

Some form of euro-area “fiscal capacity” with possible joint borrowing is at the center of an options paper presented at the summit by EU President Herman Van Rompuy.

German aides kept references to euro bonds or bills out of a statement drafted before the summit. Merkel went further in the leaders’ session that lasted until 3 a.m. yesterday, getting rid of a call for “further mechanisms to prevent unsustainable budgetary developments.”

At the same time, Germany and its allies ceded little on the question of a euro-region bank supervisor, warning that an end-of-year deadline for creating it may be missed while leaving sensitive operational issues to be settled later.

In a further blow to Spain, Merkel said the Spanish government will be liable for paying back as much as 100 billion euros ($130 billion) in loans to recapitalize its banks. Plans to give the euro rescue fund the power to inject cash directly into banks won’t be made retroactive, she said.

Summit Turnaround

Her comments mark a shift from the previous summit in June, when the newly elected Hollande scored a tactical victory by injecting a pro-growth bias into euro policy and pushing through pledges of support for Spain and Italy, then beset with near- unaffordable borrowing costs.

Finland and the Netherlands backed Germany in maneuvering that will climax at a Dec. 13-14 summit to set deadlines -- possibly as long as a decade -- for a more united economy with more disciplined budget management and central oversight.

Austria leads a second category of skeptics of a euro-zone budget, warning of duplication with the infrastructure and farm- subsidy programs that already cover the entire 27-nation EU and amount to 1 percent of the bloc’s gross domestic product.

“I see no reason whatsoever why the euro zone should promote training more strongly than other countries,” Austrian Chancellor Werner Faymann said. “We in the European Union and in Austria are reliant on all doing well, not only the euro countries.”

Countries outside the euro zone queried what the separate pot of money would be used for. Prime Minister Valdis Dombrovskis of Latvia, which hopes to adopt the euro in 2014, said in an interview: “There are more questions than answers.”

EU Budget

Legal and political complications bedevil proposals of a separate budget for the euro area, which come as negotiations over the next EU-wide spending plan head for a conclusion at the next summit, on Nov. 22-23.

Even with Greece’s future in the euro far from assured, Spain teetering on the edge of a full bailout and the specter of recession stalking Germany, Merkel has emerged from almost three years of crisis fighting as an odds-on favorite to win re- election in less than a year.

Hollande has taken an outside-in approach to dealing with Merkel, bonding with Spanish Prime Minister Mariano Rajoy and Italian Prime Minister Mario Monti and disowning the Germany- first strategy of his predecessor, Nicolas Sarkozy.

France’s influence over the remodeling of the euro zone has been further diminished by deficits and competitiveness handicaps that Hollande, by making tax increases the centerpiece of domestic policy, has done little to address.

Hollande started to ease back from a commitment to getting France’s deficit down to 3 percent of GDP next year, a target that will test his credibility with fellow policy makers and the financial markets.

“We shouldn’t give up on reaching our targets, but EU rules do say we must think in terms of structural deficit,” Hollande said.

To contact the reporter on this story: James G. Neuger in Brussels at

To contact the editor responsible for this story: James Hertling at

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