Merkel Resists G-8 Spending Pressure as Soccer Breaks the Ice

German Chancellor Angela Merkel agreed to shift the euro area’s debt-crisis response toward economic growth, avoiding a showdown with her partners as the U.S. prods Europe to stem more than two years of market turmoil.

With French President Francois Hollande newly at the table of Group of Eight leaders who met at Camp David outside Washington, Merkel faced the broadest opposition yet to her austerity-led policy for debt reduction and saving the euro. As the G-8 agreed that Greece shouldn’t exit the currency union, some German allies said even that challenge may pale if governments across the continent don’t press ahead on quick- acting programs that offer voters jobs and growth.

“Whatever is achieved on Greece in this very difficult situation will not really allow Europe and the euro zone to breathe unless a more substantive agenda of growth is decided upon in Europe to accompany fiscal consolidation,” Italian Prime Minister Mario Monti said in a CNN interview on May 20.

The euro has lost 3.5 percent against the U.S. dollar this month and almost $4 trillion has been wiped from equity markets amid speculation Greece may become the first country to leave the euro area.

No crisis solution can work without Merkel, who heads Europe’s largest economy and contributes the most of any country to the European Union’s financial backstops and bailouts for Greece, Ireland and Portugal. In less than 24 hours of talks and huddles at the U.S. presidential retreat in rural Maryland that ended May 19, she also faced pressure from President Barack Obama, who met her one-on-one after the summit.

Germany’s Role

Obama underscored “just how much leadership Germany plays within the euro zone,” U.S. Deputy National Security Adviser Ben Rhodes told reporters. Even so, “you can have the pact that Chancellor Merkel showed so much leadership in getting around fiscal reforms within the euro zone, while also pursuing steps to promote growth at the same time.”

Merkel says the 17 euro nations can’t spend their way out of the crisis and didn’t budge on that stance at Camp David. As policy makers head into another round of crisis diplomacy culminating with an EU summit on June 28 and 29, Germany has signaled it may agree to using unspent EU aid money, increasing the capital of the European Investment Bank and jointly guaranteeing “project bonds” to spur growth.

“It was very clear that, without solid finances, we will again have a great deal of uncertainty in the euro area,” Merkel said in her summary of the summit discussions. That means that growth and debt reduction “go hand in hand.”

Future Conflicts

Merkel spearheaded the fiscal pact signed by all 27 EU countries except the U.K. and Czech Republic in March, which commits governments to reducing debt and deficits.

More conflict may lie ahead. Hollande told reporters at Camp David he will propose “euro bonds” when EU leaders meet to discuss growth measures in Brussels on May 23. Merkel has rejected joint euro-area debt issuance, saying that eliminating the gaps in bond yields would remove the incentive for weaker countries to overhaul their economies. U.K. Prime Minister David Cameron, whose country isn’t in the currency union, urged Hollande to back joint debt when they met in Washington before the G-8 summit.

Monti, whom Merkel praised for spurring change in the Italian economy when he visited Berlin in January, told reporters “the most significant result of the G-8 and the most encouraging one for Italy” is that leaders agreed to “speed up and intensify action for growth at the European level,” according to a transcript on the prime minister’s website.

Challenges at Home

Merkel is also busy trying to swat away challenges at home. She came to the annual G-8 talks three days after hosting Hollande on his first visit to Berlin as president and fresh from two state election defeats for her Christian Democratic Union that spurred opposition criticism of her austerity policy.

“I see Angela Merkel as increasingly isolated,” Thomas Oppermann, the chief whip of the opposition Social Democrats, said in an e-mailed statement.

Things also didn’t go Merkel’s way in the European Champions League soccer final on May 19, which Germany’s Bayern Munich lost to U.K. club Chelsea in a penalty shootout. A Bayern fan, Merkel kept track of the game and settled down in a viewing room with Obama and Cameron for the shootout.

“And the president was able to offer his sympathy to Chancellor Merkel when that concluded, as did Prime Minister Cameron,” Rhodes said.

To contact the reporter on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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