Merkel Says Germany Backs Draghi’s ECB Aid Conditionality

Chancellor Angela Merkel backed the European Central Bank’s insistence on conditions for helping reduce borrowing costs in indebted countries, saying Germany is “in line” with the ECB’s approach to defending the euro.

“Obviously time is pressing” on stamping out the debt crisis, though “on many of these issues we feel we’re on the right track,” Merkel told reporters in Ottawa yesterday at a joint press conference with Canadian Prime Minister Stephen Harper. Euro-area policy makers “feel committed to do everything we can to maintain the common currency.”

Asked about ECB chief Mario Draghi’s announcement that the central bank may return to sovereign bond-buying, Merkel said recent ECB decisions “have made it clear that the European Central Bank is counting on political action in the form of conditionality as the precondition for a positive development of the euro.”

Merkel, facing European pressure to ease bailout terms and allow shared debt as well as calls by global partners to stop contagion, returned to the crisis fight after her summer vacation, using the trip to Canada to make her first public comments on the turmoil in a month. She hailed Canada’s budget and debt discipline as a model for the 17-nation euro area.

Draghi’s Proposal

Draghi said on Aug. 2 that the ECB might buy government bonds to help lower borrowing costs in countries such as Spain and Italy, though only in return for strict conditions and if governments act first by buying debt through Europe’s bailout funds. Spain and Italy have yet to say whether they will request aid.

“It is becoming clear that the ECB purchases have to be conditional on the implementation of austerity and structural reform measures in that country,” Citigroup Global Markets analysts led by Juergen Michels said in a note to clients.

Merkel is returning to the global stage as the crisis enters a new phase. Germany’s supreme court will rule on the legality of Europe’s permanent rescue fund next month, when Greece’s international creditors are due to report on progress in meeting bailout targets. Draghi said the ECB will thrash out the details of its bond-buying proposals by then.

Hollande, Samaras

Merkel steps up her crisis-fighting diplomacy next week, when she is due to host French President Francois Hollande Aug. 23, Paris-based Agence France-Presse reported, one day before Greek Prime Minister Antonis Samaras visits Berlin for talks. Italian media reported that Prime Minister Mario Monti is due in the German capital on Aug. 29, while Spanish Prime Minister Mariano Rajoy has said that Merkel will visit Madrid on Sept. 6.

Finnish Foreign Minister Erkki Tuomioja said his country, one of four in the euro region with the top AAA credit rating, is preparing for the currency union’s breakup, the U.K.’s Telegraph newspaper reported today, citing an interview.

“We have to face openly the possibility of a euro breakup,” Tuomioja was quoted as saying. While that’s not advocated by the Finnish government, a breakup “could make the EU function better.” Tuomioja told Finnish media today that he had only been stating the obvious.

Merkel, as leader of Europe’s largest economy and the biggest single contributor to euro-region bailouts, is facing calls from Italy and Spain to pool debt to bring down bond yields, from Greece to back an easing of its austerity timetable and from the ECB for politicians to take the lead in fighting the crisis. She also faces domestic pressure from her coalition partners to refuse any more aid for Greece.

Spanish Yields

Italian 10-year bond yields opened little changed at 5.78 percent as of 9:07 a.m. while equivalent Spanish debt slid 1 basis point to 6.49 percent. Spanish yields reached a euro-era high of 7.62 percent on July 24, beyond the threshold that prompted Greece, Portugal and Ireland to seek bailouts. German 10-year bonds yielded 1.53 percent today. The euro bought $1.2361.

Harper, who offered Merkel a barbecue with elk meat upon her arrival, Canada’s CTV news channel reported on its website, said “there are additional things that have to be done” by European policy makers. “I have great confidence in the chancellor’s leadership,” he said.

‘European Friends’

“We have great confidence in our European friends,” Harper said. “My experience has been the vast number of them are seized with the scale of the challenge and with the range of options that have to be considered.”

Even so, Greece, on its second rescue program after triggering the crisis in late 2009, may run out of road at the end of the year. Samaras’s government probably can’t come up with enough austerity measures even if creditors extend the time line as his coalition wants, according to the Citigroup note. That means an end to international funding “looks very likely” after the next audit set for December, it said.

Europeans “need to do much more,” Canadian Finance Minister Jim Flaherty told reporters two days ago. “We have been clear for several years that not only should the European countries take overwhelming concerted action to take control of the situation, but also that the European countries have more than adequate resources to do so.”

Merkel, a physicist by training, visited an ocean research center in Halifax yesterday on her trip back to Berlin. German business leaders accompanying the chancellor included the chief executives of BASF SE (BAS), the world’s largest chemical maker, ThyssenKrupp Marine Systems and K+S Group, which is involved in mining potash in Saskatchewan, CTV reported.

To contact the reporters on this story: Patrick Donahue at pdonahue1@bloomberg.net; 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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