Merkel’s Fiscal Pact Risks Pre-Election Showdown as States Rebel

Germany’s opposition-controlled states threatened to scupper domestic implementation of the European Union’s fiscal pact, undermining Chancellor Angela Merkel’s push for euro-wide budget rigor in federal elections.

The states and Merkel’s federal government have locked horns over the budget rules, with areas of contention including state calls for extra financing to help with infrastructure spending such as on schools. A mediation committee is due to meet in Berlin later today to try and resolve the dispute.

“If the federal government doesn’t move, the states are determined not to pass the fiscal pact,” Carsten Kuehl, finance minister for Rhineland Palatinate state and member of the main opposition Social Democratic Party, said by phone. “Then Mrs. Merkel will have to explain in Brussels why she hasn’t yet implemented the fiscal pact in Germany.”

The impasse risks embarrassing Merkel as she seeks a third term in the Sept. 22 election. Her Christian Democratic Union party’s platform contains a campaign pledge to push for all euro states to hold “strictly” to limits on debt as envisaged in the fiscal pact.

Merkel persuaded all but two of the EU’s 27 members in December 2011 to sign up to her fiscal pact locking in common budget rules. The German Finance Ministry, which has said the state veto is “incomprehensible,” declined to comment today.

Merkel lost control of the upper house, where the states are represented, in 2010. The fiscal pact legislation was voted down in March this year for a second time, as the opposition Social Democrats and Greens party exercised their majority in the upper chamber, the Bundesrat, to inflict a defeat on Merkel.

Kuehl said the states are looking for an additional 20.4 billion euros ($26.7 billion) for the period 2014-2019 to help them plan their spending. He threatened a “showdown” in July, when the Bundesrat is due to meet before the election, without some movement by Merkel’s government,

“If the federal government thinks it can push its luck during an election campaign, then we’ll push our luck too,” Kuehl said.

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