Merkel’s Government Urges German States to Drop Fiscal-Bill Veto

German Chancellor Angela Merkel’s government called on the country’s opposition-controlled states to drop their veto of a fiscal-compact bill after it was blocked in the upper house in an election-year squabble over costs.

The legislation was voted down for a second time in three months today, as the opposition Social Democrats and Green Party exercised their majority in the upper chamber in Berlin, the Bundesrat, to inflict a defeat on Merkel. The bill will now go to a committee of mediation.

“It’s incomprehensible,” Martin Kotthaus, chief Finance Ministry spokesman, told reporters in Berlin. “This is what Germany has fought for over the past few years in Europe.” He appealed to the states to demonstrate their sense of “European responsibility” and agree to the bill’s measures.

The blocking of the legislation anchoring the fiscal compact in German law is an embarrassment for Merkel, who pushed for the stricter budget rules at European level, winning agreement from 25 of the European Union’s 27 members in late 2011. Twelve countries have so far enacted the measure. Finance Minister Wolfgang Schaeuble has advocated a form of fiscal compact for the Group of 20 nations.

German “dithering” in approving the bill sends a “bad signal to Europe,” Saxony’s prime minister, Stanislaw Tillich, a member of Merkel’s Christian Democrats, said in the Bundesrat. The move can only be ascribed to “other issues,” Kotthaus said, citing the stand-off between the government and the Bundesrat over a treaty with Switzerland to clamp down on tax evasion.

State Friction

With federal elections due on Sept. 22, the opposition-led states have raised the stakes for approving bills on topics such as consumer finance for cutting housing energy bills and legislation to lower income tax. The mediation committee will tackle four areas of contention on the fiscal compact, including sanctions for infringing budget targets and the sale of federal-state bonds.

The fiscal compact was agreed on by Merkel’s Cabinet last year and obliges Germany’s 16 states to adjust their spending programs to help the nation balance its budget in perpetuity from 2015. Merkel’s coalition amended the implementation bill after it was initially vetoed by the states in December.

In an eight-page summary posted on the Bundesrat website, the states said they called for mediation to secure additional finance for infrastructure spending as they seek to meet deficit targets. The states also want legal clarification on respective federal and state fiscal responsibilities and on sanctions should they fail to meet targets.

In wooing German states to back the treaty before it was signed last year, Schaeuble promised to sell joint federal-state bonds to help cut debt costs for the regions, according to the Bundesrat website. The states want Schaeuble to agree to the federal government sharing joint liability for the bonds, a step he has so far rejected.

No date has been set for the mediation committee to discuss the bill, a Bundesrat spokeswoman said.

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