Merkel Rejects Whittling Down Euro Area, Says Debt Must Shrink

German Chancellor Angela Merkel said that she intends to hold the euro area together while keeping pressure on fellow members to slash debt.

“Germany has said for months, since we’ve had the euro debt crisis, that we have only one single goal: this is to stabilize the euro area as it is now, make it more competitive and push forward with budget consolidation,” Merkel told reporters in Berlin today.

Her comments reinforced denials by the German and French governments that policy makers are weighing the possibility of reducing the euro area to its strongest members to increase stability as the debt crisis engulfs Italy. Reports that Germany is “pursuing plans for a smaller euro zone are wrong,” Steffen Seibert, Merkel’s chief spokesman, said in a Twitter posting.

Merkel and French President Nicolas Sarkozy first raised the prospect of a member state exiting the euro last week when they said that Greek Prime Minister George Papandreou’s planned bailout referendum would be an in-or-out vote on euro membership. Leaving the currency area is not envisaged under current euro rules, and Papandreou later scrapped the ballot.

The French-German stance “is not to scare Greece out of the euro but rather to put fear into the hearts of wavering euro nations so that they get their act together,” Jan Techau, director of the Brussels-based European center of the Carnegie Endowment for International Peace, said in a telephone interview today. “It’s an incentive to reform because otherwise they stand to lose a lot.”

‘Deadly’ for Germany

Michael Meister, the parliamentary finance spokesman for Merkel’s Christian Democratic Union party, said Germany will resist any attempt to eliminate members of the 17-nation currency union.

“Such a shrinking process would be deadly for Germany because we would end up in a mini-euro zone with all the effects you can see in Switzerland,” he said by phone. “It would be a deadly development for an export country like Germany. It can’t be in our interest at all and if it’s not in our interest, we should do everything to keep it from happening.”

Asked by a reporter whether governments should prepare for a euro area without Italy, Merkel said the goal is for that country to regain credibility by passing debt-reduction measures and forming a new government swiftly. “I have the impression that Italy is on the right path, but time is short,” she said.

Euro Exit Motion

Meister drew a distinction between the ultimatum handed to Greece and a motion to be put to a vote at the CDU’s annual party congress calling for euro members to be allowed to exit the currency area.

“It makes sense to stress the self-determination of a state and there could be a majority for that” among party delegates due to meet in Leipzig on Nov. 13-15, Meister said.

If passed, the proposal would still have to be agreed by all three parties in Merkel’s coalition before becoming government policy. Germany would then need to persuade its European Union partners to agree to changes to the bloc’s guiding treaty to allow a country to leave the euro.

Mario Draghi, in his first week as European Central Bank president, said Nov. 3 that while it’s not illegitimate to question Greece’s place in the euro area, the bloc’s founding treaty doesn’t allow for a country to leave and it would be hard to imagine it happening.

Time Frame

European leaders at an Oct. 26 summit asked EU President Herman van Rompuy to present them with a report at their next meeting in December on a “time frame for the further strengthening of the euro zone” that should include “the question of possible treaty changes,” the German Finance Ministry said yesterday.

Merkel’s party sees changes to the EU’s governing rules as “absolutely necessary” to enforce sustainable public debt in the bloc, Meister said. Germany would be open to more liability for euro nations’ debts only after concessions on tighter fiscal integration, he said.

“The sequence of events is important,” Meister said. “We’re ready at any time to more deeply integrate fiscal policies. There is no problem from a German point of view, also as regards taxation, which is part of it. The question of joint liability can only be discussed once the first step has been taken.”

French Denial

The Finance Ministry statement was issued in response to a Reuters report, citing unnamed officials, that discussions among policy makers in Berlin, Paris and Brussels have raised the possibility of one or more countries leaving the euro area. A French government official said there are no plans to shrink the 17-nation euro region and that reports to the contrary are ridiculous.

The story was an attempt “to raise the pressure on other EU states,” Techau said. “The Germans and the French are now serious about making a push for deeper euro-zone integration.”

Rather than a smaller euro area, “we need it to grow,” Meister said. “That means we mustn’t say that those having problems at the moment get kicked out, but we must see to it that their problems get solved. That has to be the answer.”

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