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Merkel Warns of Euro Fragility, Citing Portugal Turmoil

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German Chancellor Angela Merkel
German Chancellor Angela Merkel’s warning at a campaign rally of her Christian Democratic Union today was a renewed message to France and Italy to refrain from softening euro-area rules as she revived rhetoric reminiscent of the peak of Europe’s debt crisis. Photographer: Michael Sohn/AFP via Getty Images

July 12 (Bloomberg) -- German Chancellor Angela Merkel said turmoil in global markets caused by a Portuguese bank underscores the euro region’s fragility and shows the need for governments to respect debt and deficit limits.

Merkel’s warning at a campaign rally of her Christian Democratic Union today was a renewed message to France and Italy to refrain from softening euro-area rules as she revived rhetoric reminiscent of the peak of Europe’s debt crisis.

While policy makers put “many rules” in place to prevent a repeat of the crisis, “if we now move away from those rules, for instance on the Stability and Growth Pact, on everything we’ve done to stabilize the euro, we could very quickly get into a situation where we start foundering,” Merkel said in a speech in the eastern German city of Jena.

Banco Espirito Santo SA, Portugal’s second-biggest bank by market value, roiled markets on July 10 after a parent company missed payments on commercial paper. European stocks and Portuguese bonds rebounded yesterday after a selloff, while the bank’s long-term credit rating was lowered to B+ from BB- by Standard & Poor’s.

“The example of a Portuguese bank showed us in the last few days how quickly the so-called markets are roiled, how quickly uncertainty returns and how fragile the whole euro construction still is,” Merkel said. She didn’t mention Espirito Santo by name.

She avoided speaking about the U.S.-German conflict over espionage that’s dominated her agenda for a week. Jena is in Thuringia, a state governed by Merkel’s CDU where elections are scheduled for Sept. 14.

To contact the reporter on this story: Brian Parkin in Berlin at bparkin@bloomberg.net

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net Tony Czuczka, Marco Bertacche

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