Merkel hardens stance on Euro debt sharing

Chancellor Angela Merkel hardened her resistance to euro-area debt sharing to resolve the region’s financial crisis, setting Germany on a collision course with its allies at a summit of European leaders this week.

Merkel, speaking to a conference in Berlin on Monday as Spain announced it would formally seek aid for its banks, dismissed “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” saying that they ran against the German constitution.

“It’s not a bold prediction to say that in Brussels most eyes — all eyes — will be on Germany yet again,” Merkel said. “I say quite openly: when I think of the summit on Thursday I’m concerned that once again the discussion will be far too much about all kinds of ideas for joint liability and far too little about improved oversight and structural measures.”

Spain on Monday requested Euro zone rescue loans to recapitalise its debt-laden banks. Spanish Economy Minister Luis de Guindos asked for up to euro 100 billion (£80.34 billion) in a letter to Eurogroup chairman Jean-Claude Juncker, saying the final amount of financial assistance would be set at a later stage. He said the amount should be enough to cover all banks’ needs, plus an additional security buffer.

Some market economists believe it is merely a prelude to a full bailout for the Spanish state.

The German chancellor will face an increasingly united bloc of euro-area nations at the summit as fellow leaders in France, Italy and Spain plus investors for more ambitious policies to help bring down borrowing costs across the 17-nation euro region.

The euro and stocks fell on Monday, with the Stoxx Europe 600 Index (SXXP) retreating 1.4 per cent to 243.04 as of 5:21 p.m. in Berlin. The euro dropped 0.7 per cent to $1.2483.

Merkel’s comments are also a rebuff to global partners from the US to India and China, whose leaders have been pressing Germany to do more to stem the crisis. At the Group of 20 summit in Mexico last week, Merkel was among the euro-area leaders who pledged to “take all necessary measures to safeguard the integrity and stability” of the joint currency.

“Merkel is following a very careful strategy,” Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London, said in a note on Monday. First was the fiscal pact, which most EU countries are due to ratify in July, and then comes “extending Brussels control” over national budgets, he said.

For Merkel, that’s a building block toward “eventually accepting a debt-sharing solution,” he said. “Of course, more control to Brussels means some loss of sovereignty which, for now, the French seem unwilling to accept.”

At a June 22 four-way summit meeting in Rome, Merkel faced a united front among her three interlocutors -- Italian Prime Minister Mario Monti, French President Francois Hollande and Spanish Prime Minister Mariano Rajoy -- on making the euro region’s rescue funds more flexible. She dismissed a Monti plan last week to use the funds -- the temporary European Financial Stability Facility or the permanent European Stability Mechanism -- to buy bonds, and spelled out her opposition to directly recapitalizing banks.

“There must not be an imbalance between liability and control,” she said on Monday. “For instance, we would do a European deposit insurance immediately if it doesn’t lead to common liability but to improved oversight possibilities and standards.”

As she prepares to meet again with Hollande in Paris on June 27, on the eve of the EU summit, Merkel said that European leaders have to get rid of the “deficiencies” that developed when the economic and currency union was founded 20 years ago.

“Liability and control have to be in balance,” she said. “So the goal has to be a political union in which the standard is whatever is the best, not mediocrity.”