Business World

Tuesday 12 November 2019

German states demand say in shaping future of the euro

Response to debt crisis a hurdle to establishing stability fund

Two German states governed by Chancellor Angela Merkel's party demanded a say in shaping the euro-area's response to the debt crisis, raising a potential hurdle to any attempt to pass additional measures in parliament.

The state governments in Hesse, whose biggest city is Frankfurt, and Baden-Wuerttemberg, which will hold elections on March 27, rejected paying more into a permanent crisis mechanism being forged, saying they want to influence policy at an early stage to temper any drain on their budgets.

States such as Hesse aren't "satisfied reading in the papers what the government plans", European Affairs and Justice Minister Joerg-Uwe Hahn said yesterday. Germany's 16 states "must be closely involved" in shaping the European Union's rescue facility, Willi Staechele, finance minister in Baden-Wuerttemberg, said.

The reservations in Germany's financial heartland over the post-2013 safety net underscore the balancing act Ms Merkel faces going into two EU summits this month aimed at staunching the crisis while facing elections in six German states this year.

Ms Merkel's parliamentary bloc, business lobbies and voters are already lined up against more help for indebted EU states, and Austria yesterday backed Ms Merkel in opposing any easing of conditions for bailout aid.

"I'd like to know at an early stage how the stability mechanism will be shaped in concrete terms, or under which conditions financial help will be granted once it comes into being," said Mr Hahn, a member of Ms Merkel's Free Democratic Party coalition partner.

"I categorically reject anything that leads to a European transfer union, a Europeanisation of debt, a centralisation of European economic policy or a 'financial balancing' of states."

Resistance in German states matters because they are represented in the upper house of parliament, where Ms Merkel is in the minority, and which may have a vote on additional crisis- fighting measures needed to set up the permanent rescue fund, known as the European Stability Mechanism.

Greek 10-year bond yields and credit-default swaps surged to a record yesterday after a cut in the nation's credit rating spurred bets the debt crisis may worsen and prompted Prime Minister George Papandreou to urge the EU to adopt a package that will convince markets. Portuguese 10-year bonds fell for a second day and Spanish bonds also slid.

EU leaders will meet for a summit in Brussels on March 11 to discuss steps to boost economic competitiveness originally proposed by Ms Merkel and French President Nicolas Sarkozy. A second summit will take place on March 24-25.

Two days after the second summit, Ms Merkel faces an election in Baden-Wuerttemberg. Her Christian Democrats are struggling to retain power in the south-western state after more than half a century of uninterrupted rule, currently in coalition with the Free Democrats, mirroring her national government.

The state is "already punished enough" through having to help pay for poorer German regions, Mr Staechele said. A so-called transfer union at European level will be "resisted".

Leaders are still divided over the bundle of measures to be debated, including increasing the firepower of the €440bn bailout fund known as the European Financial Stability Facility; using the EFSF for debt buybacks; and on cutting rates on emergency loans made to Ireland and Greece.

Irish Independent

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