Merkel Gives Ground on Growth, Tax to Win Fiscal Pact Support

Chancellor Angela Merkel
Chancellor Angela Merkel’s government, which has underwritten the biggest share of bailouts for debt-strapped euro countries, needs a two-thirds majority in both houses of parliament to back the fiscal pact. Photographer: Michele Tantussi/Bloomberg

Germany’s opposition parties wrung crisis-fighting concessions from Chancellor Angela Merkel after threatening to withhold support for her deficit-limit accord in a parliamentary vote.

With the timeframe narrowing for the government to pass the fiscal pact and legislation enabling the permanent rescue fund before the summer recess, Merkel agreed to put revised proposals for a financial-transaction tax to European finance ministers on June 22, Frank-Walter Steinmeier, parliamentary leader of the Social Democratic Party, told reporters after the talks.

Merkel “said clearly today that, for her, reducing debt in Europe is directly linked to an economic-growth initiative and employment, and that sustaining state finances also includes taxation of financial markets,” SPD leader Sigmar Gabriel said outside the Berlin chancellery. SPD support “depends on the concrete proposals that we’ll discuss over the next two weeks.”

Defeat or delay of the crisis-fighting legislation would be a setback for Merkel as she prepares for a meeting of Group of 20 leaders in Mexico next week followed by a European summit on June 28-29. She needs opposition votes to pass the fiscal pact and the permanent bailout fund, the European Stability Mechanism, that she has trumpeted as the mainstays of Europe’s response to the debt crisis.

“Merkel as the champion of austerity needs to fix this embarrassing back-yard impasse,” Thomas Costerg, an economist at Standard Chartered Bank in London, said by phone. Not only does “it look bad if you are trying to browbeat partners to accept your budget philosophy without your own clear national support,” any delay in launching the bailout fund “would be viewed very negatively by markets.”

Hollande Meeting

SPD leaders Gabriel, Steinmeier and Peer Steinbrueck, the finance minister in Merkel’s first-term government, are due to hold talks in Paris later today with French President Francois Hollande and Prime Minister Jean-Marc Ayrault. The SPD supports Hollande’s call for debt sharing and a refocus on growth rather than Merkel’s austerity drive to tackle the crisis.

State election losses over the last two years of the debt crisis have left German ratification dependent on the opposition, whose demands include a pledge to boost growth in Europe, a fund to pool part of the region’s existing debt and a tax on trades in shares, bonds and derivatives.

“We’ve reached agreement on very many questions, while other areas of discussion are still open,” Volker Kauder, floor leader of Merkel’s Christian Democratic bloc, told reporters. A further round of talks will be held on June 21, he said.

Target Date

The government is sticking to its pledge to pass the package by parliament’s last session before the summer recess on July 6. The European Union is targeting July 9 as the start date for the 500 billion-euro ($627 billion) ESM, an official said this month.

The two sides edged toward an agreement last week under which Merkel would seek a financial-transaction tax together with some euro-area countries. Another opposition demand to pool part of the region’s existing debt in a so-called redemption fund was rejected by Finance Minister Wolfgang Schaeuble today.

“This fund is a non-starter right now” because it would breach EU treaty rules against countries assuming each other’s debts, Schaeuble was quoted as saying in an interview with Stern magazine. “You can’t have collective liability without a common fiscal policy.”

Green Party co-leaders Cem Oezdemir and Juergen Trittin, who also took part in the talks with Merkel, said they would continue to press for the redemption fund. They cited a decision by the European Parliament today that offers backing for a similar model of debt sharing.

Ministry Proposals

Schaeuble proposed a 0.1 percent tax on share and bond trades and a 0.01 percent burden on derivative transactions, according to a Finance Ministry paper prepared for a previous round of talks on June 7. The rates are the same as those proposed by the European Commission in November, according to the government paper.

At least nine EU countries would have to agree to set up the levies before the tax could be introduced, the paper said. Germany’s legislation would have to include rules that prevent investors from devising products that avoid the tax, it said.

Merkel’s government, which has underwritten the biggest share of bailouts for debt-strapped euro countries, needs a two-thirds majority in both houses of parliament to back the fiscal pact. Opposition parties control the upper house, which groups delegates of Germany’s state governments, and have enough votes in the lower house, or Bundestag, to block legislation.

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