Merkel Fights for ‘Primacy’ Over Markets to Shift Risk

German Chancellor Angela Merkel said she is in a “battle” with financial markets to make investors shoulder part of the risk in future euro-area debt crises, as the Bundesbank rallied to her side.

Merkel, in a speech to insurers in Berlin today, reiterated that a permanent crisis-resolution mechanism is needed for the euro area once the 750 billion-euro rescue fund’s mandate expires in 2013. The safety net must include provisions that force investors and not just taxpayers to assume risk, she said.

“We in the federal government are absolutely convinced that, under a future mechanism, creditors also have to be made to participate in the cost,” Merkel said. “It is true that there is a kind of battle over what power the financial markets have and how much room for policy-making the politicians have.” At stake is “what we call the primacy of politics,” she said.

The comments echo language Merkel used in May immediately after backing aid for Greece and underscore her determination to stand firm on the debt mechanism that is to be drafted by the middle of December. European Central Bank President Jean-Claude Trichet and euro-area governments including Ireland, Portugal and Greece have criticized Merkel’s stance for worsening their debt woes.

The Bundesbank backed Merkel, saying the euro area’s permanent rescue system must ensure that holders of sovereign debt share the cost of any restructuring.

‘Indispensible Responsibility’

Private creditors “have an indispensable responsibility when it comes to restoring sustainable public finances in over-indebted nations,” the Frankfurt-based German central bank said in its monthly report today.

Bonds from Ireland to Portugal have dropped since European Union leaders agreed on Oct. 29 to consider Merkel’s proposal, part of European leaders’ efforts to replace the temporary rescue fund created in May after Greece’s near-default.

Ireland is free to apply if needed to the fund, which was established for just such cases, Merkel said.

“As far as Ireland is concerned, we have a euro safety net,” she said. “And if a country wants to use it, all I can say is that this is exactly what it was created for.”

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