Merkel Tells Her Party Europe Can't Afford to Let the Euro Fail Over Debt

German Chancellor Angela Merkel said the euro is the glue that holds Europe together, signaling that an Irish bailout may be the price of preserving European unity.

Merkel is “trying to send a clear message that Germany is pro-European, that they are ready to help out Ireland, Portugal and other countries if necessary and they will not put the euro at risk,” Henrik Enderlein, a political economist at the Hertie School of Governance in Berlin, said by phone. She “wants the Irish to take the bailout now to make it clear to everyone that the situation is safe, that markets should calm down.”

Merkel elevated the euro to a matter of life and death for European unity as the European Union statistics office said the euro area’s budget deficit swelled to more than double EU limits last year, led by Greece and Ireland. Merkel, without mentioning Ireland, said that Germany’s task is to “anchor a new stability culture in Europe” to prevent a repeat of the debt crisis.

“If the euro fails, then Europe fails,” Merkel said today in a speech to a convention of her Christian Democratic Union party in Karlsruhe, southwestern Germany. The 16-nation euro- area’s collapse would signal the end of Europe’s “uniting idea” that gave the continent peace and prosperity after World War II, she said.

The chancellor’s reminder of the euro’s importance may be a signal that an Irish bailout would not be a disaster for Europe, said Gerd Langguth, a professor of political science at the University of Bonn and a Merkel biographer.

‘Trials to Come’

“She’s preparing her party for the trials and tribulations to come and saying let’s get on with it,” Langguth said in an interview in Karlsruhe. “If Ireland needs financial help, then so be it. That doesn’t spell the end of the long march for European integration.”

Merkel spoke as euro-area finance ministers prepare to meet in Brussels tomorrow amid growing pressure on Ireland to tap the euro-area bailout fund to calm markets. As well as Ireland, ministers are due to discuss a permanent crisis-resolution mechanism being drawn up by mid-December to replace the rescue fund after its mandate runs out in 2013.

Changes to EU treaties to stem a euro crisis, dismissed by some as a “utopian” idea, can and must be made to backstop the single currency, Merkel said, defending her call to make investors pay for future debt crises. It was market “excesses” that caused the crisis, and “markets have to bear the consequences of their actions.”

Debt Mechanism Agreement

Merkel’s coalition has “agreed a set of mechanism proposals that include private investors as a core element, involving if necessary taking a haircut,” or loss on their investment, Leo Dautzenberg, finance spokesman for Merkel’s CDU, said in an interview in Karlsruhe. “Wall Street investors have also got to shoulder their liabilities. We can’t push everything on to taxpayers.”

Merkel has publicly clashed with European Central Bank President Jean-Claude Trichet over the permanent mechanism, with Trichet saying that requiring investors to take losses in a sovereign rescue would undermine confidence.

Spanish Prime Minister Jose Luis Rodriguez Zapatero said Nov. 12 that Spain opposes Merkel’s plan so “it won’t be easy” for her to win agreement for the proposal. Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro-area finance ministers, said Nov. 8 that such a move “could potentially drive investors from the euro zone, especially from the peripheral countries.”

Merkel’s insistence on making bondholders pay was presented in a “confusing” way that “no one was able to digest” and had a “very negative effect on markets,” said Enderlein. “They got it wrong and they’re trying to fix it.”

Merkel’s message to delegates in Karlsruhe “was cryptic, a massive hint,” said Kurt Lauk, who heads a business lobby within the CDU.

“What was clear to all is that Germany backs the euro and is ready to help with further rescue measures,” Lauk said in an interview. “The implicit part of her message was that the troubles are far from over, more is on the way and we’d better get ready for it.”

To contact the reporter on this story: Tony Czuczka in Karlsruhe, Germany at tczuczka@bloomberg.net; Brian Parkin in Karlsruhe, Germany at bparkin@bloomberg.net.

To contact the editors responsible for this story: James Hertling in Paris at jhertling@bloomberg.net;

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