Merkel Gives Ground on Austerity in Bid to Pass Crisis Bills

German Chancellor Angela Merkel
German Chancellor Angela Merkel hosts the talks after clashing with fellow European leaders last night over her refusal to consider joint euro-area bonds. Photographer: Jock Fistick/Bloomberg

Chancellor Angela Merkel gave ground to the opposition in a bid to pass her debt crisis-fighting measures in the German parliament, agreeing to consider measures to spur growth and a proposal on debt sharing in the euro area.

Leaders of Merkel’s coalition met with opposition party chiefs in Berlin today to try and secure the two-thirds majority needed for parliamentary approval of Europe’s budget treaty and associated legislation setting up a permanent rescue fund.

They agreed to meet again on June 13 “to clear up the open questions,” including constitutional aspects and “what a strategy for growth would look like,” Volker Kauder, the floor leader of Merkel’s Christian Democratic Union, told reporters outside the Chancellery.

Merkel called the Berlin meeting in a bid to assuage opposition anger at her austerity-first stance during the debt crisis and to secure passage of the fiscal pact and the rescue fund by parliament’s summer recess on July 6. She hosted the talks after clashing with fellow European Union leaders last night over her refusal to consider joint euro-area bonds.

While Kauder said the opposition agreed with the government that euro bonds “are not up for discussion,” the two sides will “exchange studies” on the debt-sharing proposal.

The main opposition Social Democrats and their Green Party allies raised a proposal floated by Merkel’s own council of economic advisers for a “European redemption fund” which involves common liability for sovereign debt exceeding the 60 percent of gross domestic product rule.

Removing Pressure

“Only if the pressure is removed on interest rates in the crisis states do we have a chance to spur economic growth,” Juergen Trittin, co-leader in parliament of the Greens, told reporters. “That’s why we have been so vehemently behind a redemption fund in these talks.”

Germany’s opposition, buoyed by French President Francois Hollande’s challenge to Merkel’s deficit-cutting orthodoxy, is stepping up calls for growth-boosting measures and other steps to be added to her budget consolidation demand. While the SPD and Greens have backed Merkel’s crisis-fighting in parliament so far, they are threatening to withhold support for legislation setting up the fiscal pact signed by 25 of the EU’s 27 leaders.

Both parties shifted their focus from euro bonds to the redemption fund first mooted in November by Merkel’s panel of economic advisers, known as the wise men. The fund, backed by euro member states’ gold reserves, would be worth 2.3 trillion euros ($2.9 trillion) and help governments scale back outstanding debt to below 60 percent of economic output. Limited to 25 years, it would be accompanied by a pledge by states to anchor debt limits in their constitutions and commit to economic reforms.

‘Take a Look’

The proposal cut little ice at the time with Merkel, who said that while the government would “take a look at it,” the plan raised “constitutional questions, questions about what to do with others’ debts, what it means for debt management.”

While no “concrete results” were achieved today, SPD Chairman Sigmar Gabriel said that he had the impression “the government’s blockade on growth has been broken.”

“We pointed out once again that the five wise men economic panel proposed a redemption fund to the government, which would be a good opportunity to break away from the rigid debate over euro bonds,” Gabriel said. “We heard from our European friends yesterday that that they regard it as a good proposal. Still, the government is so far being extremely reticent with respect to this proposal too, even if not rejecting it.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE