Merkel Rebuffs Euro-Area Deficit Easing Proposal Made in France

Chancellor Angela Merkel rebuffed her deputy’s suggestion to ease deficit rules in the euro area, saying governments already have enough leeway.

Merkel stepped into the debate over calls in France and Italy for greater budget flexibility after Economy Minister Sigmar Gabriel, Germany’s vice chancellor, suggested excluding the cost of economic reforms from deficits.

“I spoke with the economy minister before the cabinet meeting” in Berlin today, Merkel told reporters. “We agreed that there is no need to change the stability pact. All the flexibility we need to overcome the problems is contained in the current stability pact. That’s our joint understanding.”

Gabriel floated the proposal on June 16 after meeting French Economy Minister Arnaud Montebourg, whose government has put off cutting the budget gap to 3 percent of gross domestic product, the limit under euro-area rules, until 2018. In Italy, Prime Minister Matteo Renzi is pushing for the EU to allow a more expansive economic policy to boost growth and jobs.

Gabriel’s Social Democratic Party, which became Merkel’s junior coalition partner after German elections in 2013, campaigned on loosening the fiscal austerity that Merkel prescribed for the euro area in return for German-backed bailouts during the debt crisis.

“One idea could be not to count the costs of reform policies in some countries in deficits,” Gabriel told reporters on June 16 in Toulouse, France. “It would be a kind of swap: reforms versus deficit criteria. The reforms must be binding, but also the chance to finance them.”

He portrayed the suggestion as a German-French initiative, saying “this is what we have to discuss as part of the reorganization of European policy in the weeks and months ahead.”

Gabriel was referencing “a debate taking place in other member states without adopting their position” and “sees no need for changes to the Stability and Growth Pact,” Tobias Duenow, his chief spokesman, said at a news briefing in Berlin today.

The pact sets debt and deficit limits for the 18 countries using the euro, including the deficit ratio of 3 percent of GDP.

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