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Merkel Allies Signal Progress on Fund to Pool Debts

Opposition in German Chancellor Angela Merkel’s government to debt sharing to counter the euro region financial crisis is weakening, two of her allies said.

“I see some movement in the government” toward a proposed debt-redemption fund, Lars Feld, a professor of economics at Freiburg University and a member of Merkel’s council of economic advisers, said in an interview in Berlin yesterday.

Kurt Lauk, a former European lawmaker who heads a business group in Merkel’s Christian Democratic Union, said he would support euro countries pooling debt with a repayment period of as much as half a century. Germany’s World War I obligations weren’t paid up for almost a century, he said in an interview.

“We have to find something equivalent for the European debt situation,” Lauk said by phone from Stuttgart, adding that Merkel will have to agree to a debt-sharing arrangement to save the euro. “The German government will move before the European monetary union hits the wall.”

The comments illustrate the growing pressure on Merkel as bond yields surge in Spain and Italy and concerns mount that Greece may be headed out of the 17-nation currency union. U.K. Prime Minister David Cameron and President Barack Obama called for an immediate plan to “tackle the crisis,” Cameron spokeswoman Vickie Sheriff said yesterday.

European stocks rose while the euro dropped today. The currency fell 0.3 percent to $1.2547 as of 10:06 a.m. in Berlin. The Stoxx Europe 600 Index was up 0.3 percent at 240.73.

Yields Drop

The yield on Spain’s 10-year bond fell 14 basis points to 6.11 percent, down from a euro-era record of 6.78 percent on Nov. 17, amid speculation that European policy makers are working on a bailout for the country’s banks.

European officials are weighing a plan that would allow aid for Spain’s banks without the same austerity measures imposed on other rescued countries in a proposal that might make it easier for Spanish government to accept outside help, the Financial Times reported today, citing sources it didn’t name.

Merkel is reconsidering a proposal she rejected last year for a so-called European Redemption Fund. The plan was developed by her five-member economic council and is backed by opposition parties. Feld is now canvassing government ministries on the proposals, he said.

Government Meeting

The opposition Social Democrats and Greens met with government officials today to discuss the the fund, which is one of three conditions the opposition is placing on their support in parliament for the fiscal pact and associated legislation to set up the permanent rescue fund.

The panel is focusing on three areas to broaden acceptance of the plan, Feld said in the interview. These include addressing “opposition to its sheer size;” concerns it might not comply with German constitution and international treaties; and the scope of its proposals on member states’ liability.

The fund, backed by euro member states’ gold reserves, would be worth 2.3 trillion euros, according to the advisers’ panel estimates. Countries would be able to transfer debt exceeding the 60 percent of gross domestic product threshold into the fund for which participating member countries are “jointly and severally liable,” according to the council’s policy paper.

Merkel’s government has “considerable reservations” because the fund may violate the German constitution and international treaties, Steffen Seibert, Merkel’s chief spokesman, told reporters in Berlin.

Legal Scope

Feld said there is greater scope for the fund’s acceptance in Germany if “joint and several liability” for the fund’s bonds are substituted by “several liability,” limiting the potential fallout to states on a scale based on the size of their economies.

If, like the permanent rescue fund that European leaders aim to have up and running by July 9, the redemption fund can be created without amending European Union treaties, “then the new fund could be set up quickly,” Feld said.

The group of Liberal parties in the European Parliament, including its leader, former Belgian Prime Minister Guy Verhofstadt, back the fund, said Feld. That includes Alexander Graf Lambsdorff, chairman of the Free Democratic group that is Merkel’s coalition partner in Berlin, who outlined his support on May 27 in a guest editorial for Spiegel Online.

While resting on the resale of portions of debt, the redemption fund does not entail euro bonds, the council says on its website, thus removing a form of debt sharing opposed by Merkel. In addition, states servicing debt excluded from inclusion in the fund need to follow stringent new fiscal rules or be punished by markets.

Limited Duration

“The decisive difference from the idea of euro bonds, in addition to its limited duration, lies in the strings attached to the participation,” the council said.

While Merkel has so far balked at the plan, she may be prepared to look at it more closely amid signs that bolder steps are needed to tame the crisis, Feld said.

“We’ve gained traction among mid-level officials but still face a flat ‘no’ at the highest echelons,” Feld said. “With the European Central Bank tiring of acting as fire fighters in the crisis, Merkel may need a plan with the sweep of the redemption fund.”

Lauk said debt sharing would be acceptable to Germans as long as the cost is explained as ensuring the single currency’s future.

Still, “if you present the German people with an open- ended bill -- let’s support these guys -- there will be a decisive ‘no,’” Lauk said.

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Patrick Donahue in Berlin at pdonahue1@bloomberg.net

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

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