Nov. 14 (Bloomberg) -- German Chancellor Angela Merkel set out on a collision course with non-euro countries as she called for political union in Europe to end the sovereign-debt crisis.
In her most explicit prescription yet to tackle the crisis, Merkel told an annual congress of her Christian Democratic Union in the eastern German city of Leipzig that it’s time to push for closer political ties and tighter budget rules. Evoking the 1989 pro-democracy protests that began in Leipzig and led to the fall of the Berlin Wall, she said the crisis must be seen as a “turning point” in shaping European Union and euro policy.
“The task of our generation now is to complete the economic and currency union in Europe and, step by step, create a political union,” Merkel said today in an hour-long speech to more than 1,000 CDU delegates. “It’s time for a breakthrough to a new Europe.” At the same time, she repeated her rejection of joint euro bonds.
Merkel’s drive for closer union sets up a potential tussle with fellow European leaders at a summit on Dec. 9 that is due to discuss an overhaul of the EU’s guiding treaty to bolster the euro. Prime Minister David Cameron has pledged a U.K. ballot on any changes to EU rules that mean a shift in power to Brussels. Cameron is due in Berlin for talks with Merkel on Nov. 18.
Merkel’s speech is “a warm-up for the big quantum leap” toward a two-track Europe, Carsten Brzeski, an economist at ING Group in Brussels, said by phone. “If you wait for the Brits, you’re going to spend a lot of time at the station and the train will never come. If you want to do the quantum leap, you can only do it with the euro zone.”
While the detail “is still open,” one element of the new Europe that Merkel is pushing may include the ability for states to leave the euro, as sketched out in an amendment to the main motion being debated in Leipzig, Brzeski said.
Stocks and the euro slid today on concern that Europe will struggle to resolve the crisis. The Stoxx Europe 600 Index dropped 1.4 percent to 237.67 as of 4:48 p.m. in Berlin. The euro slipped 0.8 percent to $1.3638.
Merkel’s address marks an escalation in her rhetoric as the debt crisis that began in Greece in October 2009 sent Italian and Spanish borrowing costs to euro-era records last week and roiled French markets. After leadership changes in Italy and Greece, the chancellor is turning her attention to shaping the euro and the EU’s future.
‘Hard to Swallow’
Merkel’s message “is that either we get more Europe now or the project will die,” Ralph Brinkhaus, a CDU member of parliament’s finance committee, said in an interview in Leipzig. “This means that Germany must give up some sovereign rights and some party colleagues and voters may find this hard to swallow. But there’s no alternative.”
European leaders have asked EU President Herman van Rompuy to present them with a report at their December summit on a “timeframe for the further strengthening of the euro zone” that should include “the question of possible treaty changes,” the German Finance Ministry said Nov. 9.
With her call for closer political union, Merkel’s goal is to reassure investors that the euro has a future, Michael Meister, the CDU’s spokesman on financial affairs in parliament, said in an interview in Leipzig. That may require the EU to call a convention to rewrite its treaties, he said.
“The long-term investor who buys on a 30-year horizon wants to know what things look like here 30 years from now,” Meister said. “If you tell him there will be a political union and make it clear that we’re moving forward step by step, he’ll say, ‘This has a future that I can invest in.’”
Italian bonds fell today after the country paid the highest yield since June 1997 at a sale of 3 billion euros ($4.1 billion) of five-year notes. The 10-year Italian yield rose 25 basis points, or 0.25 percentage point, to 6.70 percent, approaching the euro-era record 7.48 percent set on Nov. 9. Spain’s bond yields rose to the most relative to German bunds since the euro was created in 1999.
In her speech, Merkel renewed her warning that “if the euro fails, Europe fails” and said her mission was to save the “historic” EU project.
Spurred by the spread of the crisis to Italy, Merkel realizes that her calls a few months ago for budget discipline and isolating the contagion in Greece are no longer enough, Brzeski said. In addition, Germany’s economic strength gives her leverage that policy makers who built the euro didn’t have.
“She can have much more of a German stamp on this political union than 20 years ago,” he said. While details remain elusive, “there’s an increasing consciousness that this is the only way forward.”
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