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Wednesday, June 27, 2012

European Union Prods Germany With Fiscal Plan

PARIS — European leaders increased the pressure on Germany to move more aggressively to defend the euro on Tuesday by publishing proposals for a more tightly knit European Union, with phased-in moves toward central banking supervision, unified deposit insurance and more sharing of the region’s debt burden.
 
Drawn up by the top European Union officials — the European Council president, Herman Van Rompuy; the European Commission president, José Manuel Barroso; the European Central Bank president, Mario Draghi; and the head of the Eurogroup of finance ministers, Jean-Claude Juncker — the plan has weight, and it seems to reflect a new willingness in Europe to isolate Berlin and compel it to accept changes it has steadfastly resisted.
The 10-year “road map” was drafted after months of discussions with the 27 member countries, especially with the 17 that use the euro. It calls for immediate steps “towards a genuine economic and monetary union,” and is meant to provide the agenda for the European Union summit meeting on Thursday and Friday in Brussels. It is also intended to give the financial markets confidence that the European Union will stand behind its members and its common currency — a harder task, given that much of the plan would take many months to negotiate and ratify.
Although watered down from an earlier draft to try to appease Berlin, the proposals brought immediate criticism from Germany, with Chancellor Angela Merkel telling her partners in her governing coalition, the neo-liberal Free Democrats, that Europe would not have total sharing of debt “as long as I live.”
Germany’s deputy foreign minister, Michael Link, a member of the Free Democrats, said that the proposals leaned “toward various models for mutualizing debt,” but that “what comes up short is improved controls.” Speaking in Luxembourg, he added, “By beginning with pooling of debt, we’re heading toward a dead end.”
Mr. Barroso, long an advocate of greater European integration, called the release of the plan “a defining moment,” while Mr. Van Rompuy emphasized that it was a document for discussion and “not meant to be a final blueprint.”
Still, it ratchets up the pressure further on Ms. Merkel. On Friday, the three leaders of the next-largest economies in the euro zone — François Hollande of France, Mario Monti of Italy and Mariano Rajoy of Spain — pressed her hard to agree to collective debt and European-wide banking supervision and deposit insurance to ease market pressure on Spain and Italy. She was also pressed to change the rules to allow bailout funds to operate like banks and purchase the sovereign debt of Italy and Spain without conditions.
Her answer then was blunt: that solidarity was possible only with serious controls and collective oversight, and that “we have existing treaties and they must be respected.” Pooling of debt could come only with pooling of sovereignty and responsibility, she said.
On Monday, Ms. Merkel was even sterner, dismissing “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” besides violating German law.
“It’s not a bold prediction to say that in Brussels most eyes — all eyes — will be on Germany yet again,” said Ms. Merkel, who is known for saying what she thinks. “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.”
Germany may be fighting a losing battle, given how quickly the markets could turn on Italy and even France. Ms. Merkel, who seems so strong when seen from abroad, has been weakened in recent months, struggling to get her Parliament to vote by the necessary three-fifths majority to approve a permanent bailout fund, known as the European Stability Mechanism, even when it is packaged with a fiscal discipline treaty she has pushed. That vote is expected to come on Friday night, when she returns from Brussels, so she must be seen, especially by the Free Democrats, to put up a strong defense of Germany’s position.
The Van Rompuy proposals recommend central oversight through a European Union bank supervisor covering all financial institutions except insurance companies, and a blocwide deposit-insurance program to ensure that there is no run on banks in Greece or other troubled countries.
But the president of Germany’s Bundesbank, Jens Weidmann, said a debate on a banking union should be part of a larger debate on fiscal and political union — on further moves to share sovereignty, like establishing a European finance ministry with the right to reject national budgets if they incur too much debt. “It makes little sense to single out the banking sector when talking about mutualization of debt,” Mr. Weidmann said Monday in Hamburg, Germany. “It’s important that a banking union doesn’t lead to euro bonds by the back door.”
The principle is acknowledged in the Van Rompuy report, which is vague about timing but proposes progress toward euro bonds and a European Union treasury after “a robust framework for budgetary discipline and competitiveness is in place.” But the report does not contain the more detailed proposals of earlier drafts, which would have given Brussels the power to rewrite national budgets and to use the bailout funds to recapitalize Europe’s banks, to avoid adding to the sovereign debt of individual countries like Spain.
Mr. Van Rompuy does suggest that national governments agree on “upper limits” for national debt and deficits. The Berlin-inspired fiscal discipline treaty, now being ratified by European Union members, would impose deficit limits of 3 percent of gross domestic product and gradual progress to reducing overall debt to 60 percent of G.D.P.
Mr. Van Rompuy has said he hopes that this week’s summit meeting will begin a process that will produce detailed proposals by December.
Steven Erlanger reported from Paris, and Stephen Castle from London.

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