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Germany leader opposes full debt sharing in Eurozone crisis

On the eve of a European summit, German Chancellor Angela Merkel touts tighter budgetary controls and says debt sharing will not occur 'as long as I live.'

June 27, 2012|By Aaron Wiener, Los Angeles Times
  • German Chancellor Angela Merkel addresses the Bundestag, the lower house of Parliament, in Berlin.
German Chancellor Angela Merkel addresses the Bundestag, the lower house… (Adam Berry / AFP/Getty Images )

BERLIN — As European leaders gather in Brussels on Thursday for a two-day summit aimed at resolving the Eurozone's debt crisis, German Chancellor Angela Merkel's response to the most aggressive proposal pushed by her neighbors is, in essence: Over my dead body.

With borrowing costs for Spain and Italy approaching unsustainable levels, European Union leaders have stepped up their pressure on Germany to accept solutions it has long resisted. But Merkel, whose country has Europe's largest economy and probably will foot the highest share of the bill for rescuing its struggling neighbors, has dug in her heels.

In response to the widespread call for euro bonds, which would allow European countries to issue debt jointly and could ease the cost of borrowing for highly indebted southern European countries, Merkel said Tuesday that full debt sharing would not occur "as long as I live."

A road map issued Tuesday by four senior European officials — European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso, European Central Bank President Mario Draghi andJean-Claude Juncker, head of the group of Eurozone finance ministers — laid out a range of proposals for discussion at the summit, including possible moves toward debt sharing.

However, Merkel said Wednesday that the focus should be on tighter budgetary controls across the Eurozone, the 17 nations that share the euro currency.

"I'm afraid that at the summit there will be much too much talk about joint liability and far too little about improved oversight and structural measures," Merkel said in an address to the Bundestag, the lower house ofGermany'sParliament. "Oversight and liability must go hand in hand. There can only be joint liability when adequate oversight is ensured."

Merkel's deputy foreign minister, Michael Georg Link, likewise criticized the road map as a "wish list" that wouldn't win German backing.

Germany is wary of proposals that would allow debt-ridden countries to relieve their burdens without first implementing painful cost-cutting measures, particularly when German taxpayers' money is on the line. But with fear growing that Italy and Spain — the Eurozone's third- and fourth-largest economies, respectively — are fast reaching the point where they cannot sustain their debt, critics say the Merkel administration is not acting with due haste.

"In Germany, the feeling of urgency is still not strong enough," said Sebastian Dullien, a Berlin-based economist and senior fellow at the European Council on Foreign Relations.

In Madrid, Prime Minister Mariano Rajoy told lawmakers that the cost of borrowing since Spain recently requested a bailout for its banks has climbed so steeply that the nation might not be able to finance itself much longer through debt.

"We can't keep funding ourselves for too long at the prices we're currently paying," Rajoy said. The summit may yield agreement on a number of small measures to ease the continent's debt crisis, such as removing the so-called preferred creditor status of the Eurozone's permanent bailout fund in order to reassure other lenders to struggling countries that they would get their money back. Germany appears open to the idea, at least for Spain.

But few expect progress at the summit on more decisive measures to reassure nervous investors, such as debt sharing. Dullien considers it unlikely that Germany will consent to the major controversial proposals of the road map.

"The Germans have always been talking about political union, and the paper is talking a bit about political integration, but I don't think it's enough to calm German fears that the others are trying to get into their purse," he said. "I believe especially on the debt issue there will be no result at this summit."

A Eurozone official agreed that debt sharing is "not something to which there could be a binding commitment at this stage" but expressed optimism on German agreement with other aspects of the road map.

The official, who requested anonymity due to the sensitivity of the discussions, also sought to downplay Merkel's "as long as I live" comment, which caused a major stir in the German media.

"She's been quoted differently by different people," the official said. "Some say it was a joke, some that she was serious."

By ruling out total debt sharing, Merkel may have left the door open for discussion at the summit of a less dramatic approach, such as a redemption fund to pool countries' debts beyond a certain level. But German leaders have expressed skepticism of such proposals.

But the biggest proposals, such as euro bonds, are off the table now, as the president ofGermany'scentral bank, Jens Weidmann, hammered home Wednesday in the daily Sueddeutsche Zeitung. In his opinion piece, he derided "innovative" constructions such as euro bonds and a debt redemption fund and said they would "jeopardize the currency union."

"The bottom line," Dullien said, "is that this summit will bring some small progress, but it won't be the summit to end the crisis."

Wiener is a special correspondent.

Special correspondent Lauren Frayer in Madrid contributed to this report.

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