German Chancellor Angela Merkel left open a potential compromise on debt sharing in the euro area as Italian Prime Minister Mario Monti said he can help bring Germany round 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 Thursday to reconsider a separate proposal on common liability for sovereign debt.
The blueprint, first mooted 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 discuss the matter further on June 13.
“All German political parties remain opposed to ‘classical’ euro bonds and to common debt issuance for all purposes,” Julian Callow, chief European economist at Barclays Capital in London, said in a note. “However, if a more narrow definition of euro bonds is considered, such as the Council of Economic Advisors’ proposal for a debt redemption fund, then we believe that support has been increasing” so long as “some conditionality or sharing of fiscal policy were achieved.”
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 at her austerity-first stance during the debt crisis to win the two- thirds majority needed to pass the bills in both houses.
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.
“Europe can have euro bonds soon,” Monti said in an interview on Italian television station La7 yesterday. Germany has an 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 will “exchange studies” on the redemption fund before next month’s meeting.
The fund, backed by euro member states’ gold reserves, would be worth 2.3 trillion euros ($2.9 trillion) and help governments cut outstanding debt to below 60 percent of economic output. 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.
“Only if the pressure is removed on interest rates in the crisis states do we have a chance to spur economic growth,” Juergen Trittin, the Greens co-leader in parliament, told reporters. “That’s why we have been so vehemently behind a redemption fund in these talks.”
Sigmar Gabriel, chairman of the main opposition Social Democrats, said that while no “concrete results” were achieved, he had the impression “the government’s blockade on growth has been broken.”
“We pointed out once again that the five wise men economic panel proposed a redemption fund to the government, which would be a good opportunity to break away from the rigid debate over euro bonds,” Gabriel said. “We heard from our European friends yesterday that that they regard it as a good proposal. Still, the government is so far being extremely reticent with respect to this proposal too, even if not rejecting it.”
The EU summit ended early Thursday with an exhortation to Greek voters to elect a pro-austerity government on June 17 that makes the budget cuts needed to keep the financially ravaged country in the euro.
“If Italy one day left the euro and reacquired its own autonomous currency, with interest-rate freedom, and the new lira was devalued, it would be a huge problem for Germany’s exports,” Monti said. “And it would also be a major problem for Italy.”
Greece’s next government must live up to its bailout pledges as easing the terms would create a moral-hazard risk, he said.
“Clearly, if Europe says that we’ll ease the terms, then it’s a gift to the most extreme political forces and penalizes the biggest parties,” Monti said. “Then others such as Portugal would expect the same thing.”
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