German Chancellor Angela Merkel is set to snub investor pleas to back an expanded European Central Bank role in solving the debt crisis, as she pushes her demand for tighter economic ties in Europe as the only way forward.
In the days before a speech to German lawmakers tomorrow outlining her stance for a Dec. 9 European summit, Merkel has repeated her push to rework European Union rules to lock in budget monitoring and enforcement and seal off the ECB from political pressure. That risks a showdown with fellow EU leaders and extends her conflict with financial markets looking for immediate measures to end the contagion.
“The market is questioning Merkel’s tough approach,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said by phone today. Investors want “clarity on what the framework will look like and what the financial bridge will look like” to fund euro-area governments and banks that need aid while fiscal ties are negotiated.
Merkel’s refusal to deploy the ECB is a rebuff to President Barack Obama after he exhorted Europe’s leaders to take more action to combat the crisis. The chancellor is loath to agree to follow the Federal Reserve and the Bank of England in policies she views as akin to fighting debt with more debt. Enlisting the ECB in battling the crisis would violate the central bank’s independence and set it on a course of action that might not work, destroying its credibility.
The ECB is independent and must choose its own method of ensuring the euro’s stability “without being praised or criticized” and states must protect that independence by improving their finances, the Westdeutsche Zeitung quoted Merkel as saying in an interview released today. The government sees joint euro bonds as “the wrong remedy in this phase of European development and even damaging,” she told the newspaper.
Underscoring the focus on debt cutting, Germany will propose that each euro country set up a national debt-reduction fund as one way to boost market confidence, Finance Minister Wolfgang Schaeuble said in Berlin today. Each country could pay into the fund every year until its debt level returns to the euro-area limit of 60 percent of gross domestic product, he told reporters.
Merkel’s drive to pursue economic and political convergence may still not be the final word. “You can’t put the cart before the horse,” she said in a Nov. 23 speech to parliament.
ECB President Mario Draghi signaled today that the central bank could do more to fight the crisis in return for fiscal union, one day after the ECB joined the Fed and four other central banks to lower financing costs for banks. Michael Meister, the parliamentary finance spokesman for Merkel’s party, has said that greater integration is a precondition for any German rethink of its opposition to “joint liability.”
“If the euro zone succeeds in agreeing on more political integration with clear consequences for breaching fiscal and economic rules, the German government should eventually give up its resistance to euro bonds,” Carsten Brzeski, an economist at ING Group in Brussels, said in a commentary for Bloomberg Brief.
Throughout the market turbulence and conflict with allies, Merkel hasn’t budged, saying that euro bonds aren’t the answer for now. Her refusal to sanction using the ECB clashes with French President Nicolas Sarkozy’s government, while her focus on changing Europe’s rules irks countries such as the U.K. and Ireland, where voters twice rejected EU treaties in referendums.
“Not everyone is enthusiastic about treaty change because that requires a difficult process of consensus in individual governments, parliaments and populations for some,” Merkel told reporters on Nov. 29. “Still, I believe that those who give us money for government bonds in Europe expect that we have to ensure enforcement of the Stability and Growth Pact more strictly than in the past.”
Germany is seeking changes to the EU’s rulebook to allow closer monitoring of euro countries’ budgets, with sanctions against persistent offenders and potential veto power over national spending plans wielded by the EU Commission, the EU’s Brussels-based executive. EU President Herman van Rompuy is due to present proposals for treaty change at the Dec. 9 summit.
Merkel, who has signaled she doesn’t want financial markets or even her own economic advisers imposing solutions for the debt crisis, is sticking to the crisis-fighting arsenal built up since Greece, the euro area’s most indebted country, was bailed out in May 2010. Six months later, as Ireland prepared to join Greece in requesting a bailout, Merkel said policy makers have to assert “primacy” over the markets in “a kind of battle.”
Germany and Europe don’t have “unlimited financial strength” to counter the crisis, Merkel’s chief spokesman, Steffen Seibert, told reporters Nov. 28. That’s “why the German government reacts so skeptically to the many calls for Europe to finally free up the really big, final financial reserves, which the Anglo-Saxon world likes to call showing the bazooka.”
In the latest bid to tame the crisis, European finance ministers said yesterday they would seek a greater role for the International Monetary Fund alongside their own bailout fund, the European Financial Stability Facility.
Schaeuble said the IMF option, along with the EFSF’s ability to buy sovereign bonds and guarantee as much as 30 percent of bond issues by troubled governments, guarantees that all euro-area members will meet their financing needs well beyond the first quarter of 2012.
‘Game of Chicken’
The EFSF looks like “yesterday’s story” as German policy makers play a “huge game of chicken” over future economic and monetary union to achieve their budget-tightening aims, said Jim O’Neill, chairman of Goldman Sachs Asset Management.
“How close to the edge do you want to take this?” O’Neill said yesterday in a Bloomberg Television interview with Francine Lacqua. “It needs Germany and the ECB to decide whether they want EMU to exist or not, because that’s how it’s going.”
Merkel and Sarkozy, at a Nov. 24 meeting in Strasbourg with Italian Prime Minister Mario Monti, agreed to stop discussing the ECB’s role in the debt crisis. Three days later, French Budget Minister Valerie Pecresse, who is also the government’s spokeswoman, suggested that more help from the ECB may be forthcoming if euro states implement tougher budget rules.
“A new fiscal compact” is “definitely the most important element to start restoring credibility,” Draghi told European lawmakers in Brussels today. “Other elements might follow, but the sequencing matters.”
Merkel’s insistence on debt and deficit reduction is yielding results. Crisis-driven government changes in Italy and Spain ushered in leaders who pledge budget cuts, while EU states including France agreed to look at locking debt reduction into its constitution. Forecast growth in Germany, Europe’s biggest economy, of 2.9 percent compares with a euro-region average of 1.6 percent this year, according to the Paris-based Organization for Economic Cooperation and Development.
Merkel’s refusal to put more German wealth on the line to save the euro area “is not a categorical rejection,” said Brzeski of ING Group. “It is all about the sequence of events and decisions.”
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