Merkel Offers Spain No Respite as Debt Cuts Seen As Key

Angela Merkel
German Chancellor Angela Merkel speaks during the debate with students in Prague. Photographer: CTK via AP Images

Chancellor Angela Merkel opened her campaign to win back Germany’s most populous state in May 13 elections by appealing to voters to endorse her message of austerity as the prime means to tackle Europe’s debt crisis.

“It’s partly about still being able to shape our own future,” Merkel said late yesterday at a rally in the city of Muenster in North Rhine-Westphalia. Countries in Europe that have run up debt “are so tightly in the hands of the financial markets that they can’t make independent decisions anymore. We have to watch out that high interest rates on our debt don’t lead to the point where we can’t decide and shape anything anymore” in Germany.

Merkel’s comments underscore a focus on her government’s record of pressing for deficit cuts as a core campaign theme for the state elections next month even as investors and economists call for Germany to step up its response to the debt crisis now marauding Spain. The ballots will offer a snapshot of public support for her crisis handling as well as a foretaste of voter sentiment before the next federal election due in 2013.

Merkel’s message was reinforced by Finance Minister Wolfgang Schaeuble, who said separately that any amount of bailout funds and financial firewalls “won’t solve the problem” without a commitment to reduce debt and raise competitiveness, the root causes of the crisis.

Debt-Cut Push

“That’s why the countries with too high debt, Germany included, have to reduce debt,” Schaeuble said in an interview with SWR television in Berlin as Merkel spoke in Muenster. “And the countries with insufficient competitiveness have to become more competitive. Then you need a common finance policy in Europe -- that’s the fiscal pact. And if you need anything else, then you build the firewall. If you only build the firewall, you can take 10 trillion and it’s not going to solve the problem.”

Spanish government bonds advanced, pushing the 10-year yield down almost 17 basis points to 5.89 percent, after Spain sold more than the 3 billion-euro ($3.9 billion) maximum target set at a debt auction today. The euro was little changed at $1.3143 as of 5:01 p.m. in Berlin.

Spanish bond yields touched 6.16 percent yesterday, their highest this year and closer to the 7 percent level that caused its neighbors to seek bailouts. Credit-default swaps signaled a 37 percent chance the euro area’s fourth-biggest economy will default, prompting Spanish officials to call for additional help from the European Central Bank. Economy Minister Luis de Guindos was due to meet ECB President Mario Draghi in Frankfurt today.

‘Warning Shot’

“The expectation is that Spain can make it -- while the widening bond spreads we’ve seen should be taken as a warning shot from markets,” Norbert Barthle, the parliamentary budget spokesman for Merkel’s Christian Democratic Union, said by phone today. “There’s no Spanish bailout talk in Berlin.”

Spanish Prime Minister Mariano Rajoy has the capacity to calm financial-market jitters by “sticking to his word on budget savings,” CDU deputy caucus chairman Michael Meister said in a separate interview. Further spending cuts may be necessary to meet budget targets Germany because “we in Germany can accept one revision only.”

Germany faces criticism for its anti-crisis policy of spending cuts from economists such as Nobel laureate Paul Krugman. Spain needs a new remedy to its ills since its story “bears no resemblance to the morality tales so popular among European officials, especially in Germany,” Krugman said yesterday in a New York Times article headlined “Europe’s economic suicide.”

Soros Concerns

Billionaire investor George Soros told a conference in Berlin last week that Europe’s German-inspired fiscal compact to promote budgetary discipline can’t work in its current format and that the euro is “broken and needs to be fixed.”

“I know the concerns” of Soros, Schaeuble said in his interview. “I don’t share them.”

“I think many haven’t really understood what European integration is,” he said. “It’s something new and that’s something they don’t really understand. We’re creating step by step a common financial policy in addition to the monetary policy we already have. And the fact that we didn’t have this from the start is something he couldn’t really understand.”

Muenster Cathedral Address

Merkel may be propelled by domestic electoral arithmetic to listen to opposition calls to do more to fight the crisis. With support collapsing for her Free Democratic national coalition partner, Merkel’s chances of winning a third term next year might hinge on her willingness to hook up with the Social Democrats in a rerun of her “grand coalition” of 2005-2009. The opposition SPD backs joint euro-area bonds to stop what it calls the “downward spiral” of “eternal rescues.”

Merkel, addressing CDU supporters yesterday on the square outside Muenster cathedral, did not mention Spain during what was the first of 15 campaign stops in 25 days. Schleswig-Holstein votes on May 6, followed by North Rhine-Westphalia, which with almost a quarter of Germany’s 82 million people is a bellwether for national political fortunes.

The chancellor is campaigning to recapture North Rhine-Westphalia after the Social Democrats took the state from the CDU at a vote in May 2010, days after she backtracked and agreed to a first bailout in Greece. The result deprived Merkel of her majority in the national parliament’s upper house, the Bundesrat, where states are represented.

Polls suggest her party is facing an uphill struggle to win back the state. The Social Democrats lead by 40 percent to the CDU’s 29 percent, an Info poll for Wirtschaftswoche magazine showed on April 14. With the Greens at 10 percent and the Free Democrats at 3 percent, the SPD-Greens coalition government that displaced her bloc in 2010 may be poised to resume power. Info polled 1,005 voters on April 4-7. No margin of error was given.

Voters in the state face a choice between “living on borrowed money” and “a good future for you and your children” that requires reducing debt, Merkel said. Differences over the importance of cutting debt are “the focus” of the campaign.


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