Chancellor Angela Merkel is being pushed by German states to share their borrowing costs to ease their budget squeeze, a policy she has opposed to confront the financial crisis in the rest of the euro region.
The opposition Social Democrats plan to press Merkel on so-called Deutschland bonds at a meeting on May 24, Norbert Walter-Borjans, finance chief of North Rhine-Westphalia, the nation’s biggest state, said in an interview. She needs their support to win parliamentary backing for the tougher European fiscal rules she championed.
“The parallel between efforts to push euro bonds and Deutschland bonds is remarkable: the motivation for the push, the timing and the risks,” Thilo Schaefer, an analyst at the IW economic institute in Cologne, said by phone. “We know her position on euro bonds. If states open a new offensive for Deutschland bonds, then she faces the same pressure from a different angle.”
German borrowing costs plunged as investors sought a haven from the doubts that Greece can remain in the 17-nation currency zone. The yields on German two-, five-, 10-and 30-year bonds have declined to the lowest on record. States have benefited as well, with five-year debt from North-Rhine Westphalia dropping to as low as 1.5 percent last week from more than 3 percent in 2011. The federal government pays 0.5 percent to borrow for five years.
Germany’s opposition-controlled states want Merkel to agree to a form of shared debt liability with the federal government to help them meet constitutional budget limits, said Walter-Borjans. Merkel has said giving euro members that kind of relief would weaken their resolve to cut debt.
“Joint state-federal bonds in light of the challenges to the states of implementing the fiscal pact make sense,” Walter-Borjans said. “Potentially significant savings could be made by the states in selling German bonds that in turn would help us fulfill the terms of the pact.”
As throughout the crisis since it first emerged in Greece in late 2009, Merkel’s response will be shaped by domestic political considerations. With elections looming in 2013, polls show that German voters back her demand that Europe clamps down on budget deficits, a provision that won expression in the fiscal pact signed in March by 25 of 27 Europe Union leaders.
While the pact faces a referendum in Ireland this month and skepticism from newly elected French President Francois Hollande, Merkel has to satisfy demands from opposition at home to ensure it passes both houses in Berlin.
Merkel enjoys a majority in the lower house, yet her bloc falls short of the two-thirds needed to pass the legislation. The upper house is controlled by opposition SPD and Green Party states. That makes her pledge to pass the fiscal pact and associated legislation to set up the permanent rescue fund by the summer recess hostage to an opposition buoyed by success in state elections this month.
Help for states struggling to comply with terms of Germany’s own constitutional “debt brake” was among a list of steps outlined by SPD leaders on May 15. While the agreement gives states until 2020 to balance their budgets, the pact stipulates that member states run a maximum structural deficit of 0.5 percent of gross domestic product in the “medium term,” or as early as 2014. The SPD said it is seeking clarity from the European Commission.
“We need answers to these pressing questions” in assessing whether to support the fiscal pact, Frank-Walter Steinmeier, the SPD floor leader who was foreign minister in Merkel’s first-term government, told reporters.
Germany’s 16 states had 531 billion euros ($676 billion) of debt as of January, about half the federal government’s 1.07 trillion euros, according to the Finance Ministry in Berlin. The sum doesn’t include municipal debt. North Rhine-Westphalia owed the most, at 130 billion euros, and Saxony’s 9.4 billion euros was the least.
Merkel said in December that she liked the idea of selling Deutschland bonds. The proposal commanded support from states, including Schleswig-Holstein, then ruled by Merkel’s Christian Democrats with the Free Democrats as junior partner, an alliance mirroring her federal government, which said the plan would help save 40 million euros.
Yet Bavaria, home to the world’s two-biggest makers of luxury cars, Bayerische Motoren Werke AG and Audi AG, argued the measure would weaken budget discipline, an argument Merkel deploys against euro bonds. In March, Merkel’s chief spokesman, Steffen Seibert, said she opposed the idea of Deutschland bonds.
Euro bonds will meanwhile be a topic at tomorrow’s summit of European leaders, French Finance Minister Pierre Moscovici said in Berlin yesterday after talks with his German counterpart, Wolfgang Schaeuble.
“Merkel’s chief counter argument to the proponents of euro bonds is that selling the debt would remove pressure to stick to budget pledges, a new moral and financial hazard would spring up as countries exploit low interest to finance their budgets,” said IW’s Schaefer. “This argument applies exactly to German states’ call for Deutschland bonds: Poorer states like Bremen or Saarland need help but in a way that encourages thrift.”
© Copyright 2021 Bloomberg News. All rights reserved.