Merkel Faces Hollande Pleas to Shed Taboos at Crisis Summit

May 23 (Bloomberg) -- Bloomberg's Mike McKee reports the European Leaders Summit finds German Chancellor Angela Merkel as the key figure in the fight against the European debt crisis. He speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

A plea to shed “taboos” may put German Chancellor Angela Merkel in a corner today as she digs in against joint debt sales to counter Europe’s financial crisis.

Merkel, the dominant figure in more than two years of crisis-fighting, heads to a Brussels summit unable to stifle calls for measures she opposes, including euro bonds, the use of European money to recapitalize banks, a bigger rescue fund and extra time for debt-swamped countries to cut spending.

“Policy makers across the euro area continue to act in their own interest,” said David Song, a currency analyst in New York at DailyFX.com, the research unit of FXCM Inc. (FXCM) “We may see a growing rift between France and Germany as the anti-austerity movement gathers pace.”

The summit, the 18th since Greece was convulsed by debt and the first since an anti-austerity campaign carried Francois Hollande to France’s presidency, takes place with market indicators showing mounting stress on banks.

European Union officials damped expectations for the 27- nation summit starting at 7 p.m., eying the next meeting on June 28-29 as the time to take pro-growth steps. The crisis in the 17 euro countries will come up tonight only “at the very end,” EU President Herman Van Rompuy said in a pre-summit letter.

Shifting Dynamic

Merkel is on the defensive at home after her party was routed in May 13 elections in Germany’s most-populous state and internationally after her hard line on budgets was drowned out by pro-growth appeals at last week’s Group of Eight meeting. Merkel’s Christian Democratic bloc dropped four percentage points to 31 percent, the lowest level since October, while the main opposition Social Democrats gained a point to 27 percent, a weekly Forsa poll for Stern magazine showed today.

The election of Hollande shifted the dynamic within Europe, putting France in the pro-euro bond camp along with Italy, Belgium, Luxembourg and peripheral countries relying on European aid or at risk of needing it.

Merkel will stand her ground, a German official told reporters in Berlin yesterday. Finland, the Netherlands and Austria also oppose common bond sales, which would require better-off countries to guarantee the borrowing of financially shakier ones.

“I won’t sacrifice the Austrian credit rating,” Austrian Finance Minister Maria Fekter said in Vienna yesterday. “I’m not willing to see Austria potentially pay double the interest rates we currently do.”

German Demands

The polemics leave the European Central Bank as the first line of defense in a market panic, though a German-led faction on the ECB is against adding to the 212 billion-euro ($270 billion) stockpile of government bonds it has amassed during the crisis.

Backers of joint borrowing want the end-of-June summit to sketch out a roadmap to euro bonds while respecting German demands that only fiscally sound nations will qualify, an official from one of the countries said.

Such a timetable would chime with Van Rompuy’s plea for “no taboos concerning the longer-term perspective.” In the invitation letter, he said “the perspective of moving toward a more integrated system would increase confidence in the euro.”

The euro approached a four-month low against the dollar amid doubts the summit would mark a breakthrough toward such a system or address more immediate concerns about Greece’s fealty to its bailout program or the health of Spain’s banks. The common currency fell 0.4 percent to $1.2638 at 10:14 a.m. in Brussels.

Growth Initiative

One growth initiative made headway yesterday when representatives of governments and the European Parliament agreed on a pilot phase for “project bonds” to back private infrastructure construction. Some 230 million euros of EU guarantees will be available to mobilize 4.6 billion euros in investment in 2012 and 2013.

Spain, meantime, is embarking on its fourth attempt in three years to shore up lenders saddled with about 184 billion euros of what the Bank of Spain calls “problematic” real estate-linked assets.

Prime Minister Mariano Rajoy has ruled out tapping the euro area’s rescue funds since that would put Spain under the same sort of supervision as Greece, Ireland and Portugal, the three countries drawing on official aid.

Euro governments are divided over whether to circumvent those conditions by allowing the planned permanent rescue fund to lend to banks directly, an EU official told reporters in Brussels yesterday.

Greek Challenge

Greece is gearing up for new elections on June 17 after an anti-bailout party surged to second place in balloting on May 6, denying a parliamentary majority to the two parties that have dominated the country since the 1970s.

The head of the anti-capitalist Syriza party, Alexis Tsipras, visited Paris and Berlin this week to broadcast his determination to halt the budget cuts demanded by Greece’s international creditors. He didn’t meet anyone from Hollande’s or Merkel’s government.

Austerity is the problem, not the answer, Tsipras said. He challenged Germany to throw Greece out of the euro, telling reporters that “no political leadership would want to take responsibility” for the ensuing cascade of departures.

Next month’s revote looms as a referendum on whether Greece stays in the euro, since an Athens government that goes back on austerity would be cut off from the next installments of the 240 billion euros in aid pledged since 2010.

The Organization for Economic Cooperation and Development lashed out against loose talk of Greece quitting a currency meant to be unbreakable, questioning whether European leaders have done enough to stabilize the system.

“Are we offering the necessary safety net and therefore a way not out of the euro but out of the crisis?” OECD Secretary- General Jose Angel Gurria told reporters in Paris yesterday. “I think we can do better.”

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net

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

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