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Germany Is Open to Pooling Debt, With Conditions

Angela Merkel, Federal Chancellor of Germany at the Annual Meeting 2011 of the World Economic Forum in Davos, Switzerland, January 28, 2011. (Photo: Sebastian Derungs /

Berlin – Pressed by a banking crisis and turmoil in the markets, Germany has indicated that it is prepared to accept a grand bargain that would provide greater support for its most indebted euro zone partners in exchange for more centralized control over government spending in Europe.

The German chancellor, Angela Merkel, said that finding the way to “more Europe, not less” was the next task for Europe’s leaders. “The world wants to know how we expect the political union to complement the currency union,” Ms. Merkel said at a news conference here Monday with José Manuel Barroso, the president of the European Commission. “We have to find an answer in the foreseeable future.”

German officials remain adamant that they are not talking about euro bonds, or jointly issued debt, which they have dismissed as unconstitutional. More likely is a plan to combine much of Europe’s bad debt into a single fund with the idea of paying it off over 25 years, an idea gaining traction in Germany as an alternative to euro bonds, officials say.

The worsening crisis has led to a sweeping effort to chart a new path forward for the union, one that encompasses fiscal integration, Europe-wide banking supervision, and tighter coordination of economic policies.

German leaders have not provided details of a potential deal — and not every country may be eager to sign on — but it would be likely to mean an expansion of executive power in Brussels over fiscal targets in member states and supervision of their banks, along with Europewide deposit insurance. It would go far beyond what was contemplated for Europe even six months ago.

Changes on this scale would not be easy, involving an arduous process of treaty alterations that could take years, and it is unclear if they would be enough to reassure markets of the stability of the euro. But as Ms. Merkel has repeatedly made clear, Germany would be open to rescuing ailing banks and member states in the region only if that were part of an overhaul of the basic architecture of European governance.

Such an expansion of central authority is not assured of universal support. While the weaker countries might be expected to sign on, it may well be opposed by Britain, which opposed an earlier effort to increase fiscal discipline out of concern for the effect on its banks.

Even less certain are the positions of Italy and, most problematic, France. Neither wants to find itself in the position of answering to fiscal and banking authorities that, fairly or not, will almost inevitably be deemed an arm of the German government.

But almost everyone agrees that something has to be done, and quickly. George Soros, the billionaire hedge fund investor, warned over the weekend that the “political and social dynamics” of the euro zone were “working toward disintegration,” and said that officials had at best a three-month window to repair the internal contradictions of the currency union.

Predictions of the euro’s demise in the absence of bolder action have grown louder as global growth slows, banking-sector woes compound and governments wobble. The mood was further depressed on Monday when the Group of 7 finance ministers said that they would hold an emergency conference call on Tuesday on the crisis and Portugal announced that it would become the latest European country to fall short of its growth forecast.

As the troubles mount, all sides turn to Germany, the only country with the financial wherewithal to calm the turbulence and guarantee the currency zone’s collective solvency.

“Nothing can be done without German support,” Mr. Soros said.

German officials worry that without safeguards on spending and deficits, the country would quickly be bled dry by overspending partners. To forestall that danger, a proposal by the government’s independent council of economic experts to pool excessive debt has garnered increasing attention.

Under the plan, largely ignored when it was introduced late last year, the debt overhang in the 17 members of the euro currency union — defined as any debt exceeding 60 percent of gross domestic product, or nearly $3 trillion by some estimates — would be transferred into a fund that would be paid off over roughly 25 years. The proposal differs from euro bonds in part because it is limited in scope rather than open-ended, which could help win approval by the German Constitutional Court.

“We have the impression due to conversations with government officials that the government is really examining the pact and the proposals,” said Wolfgang Franz, an economics professor at the University of Mannheim and the chairman of the council. “If I reject euro bonds, if I reject the European Central Bank, we don’t have many measures other than hope.”

Hope has been in increasingly short supply. Mr. Barroso said it was necessary to signal that the euro zone “will do whatever is necessary to assure the stability of our currency. We need to do things faster and we need to go further,” Mr. Barroso said Monday at the news conference. “It is now evident that also for the stability of the euro we need some concrete measures regarding the euro area and the European Union in general.”

What took years to develop could take a surprisingly short time to come crashing down, experts say. The answer from Berlin on euro bonds has never been an absolute “no.” It has always been “not yet.” Only a more integrated euro zone will tap Germany’s good credit, Ms. Merkel has made clear, saying time and again that euro bonds come at the end of that process.

Before everyone throws money into one big pot, in other words, Berlin wants commitments to deeper integration, which means individual states giving up sovereignty to a central fiscal authority. Yet, where Germans talk of safeguards, other Europeans howl about dominance and diktats from Berlin.

“It was not us who were stepping on the brakes regarding deeper integration as far back as the Maastricht Treaty,” said a German official, speaking on the condition of anonymity about the confidential negotiations. “But we have to be careful not to push too hard because then resistance would grow.”

European leaders would prefer to debate behind closed doors the steps they can take to slowly knit together their policies into a more stable currency union. But the pressure from nervous financial markets and the fears of a sudden jolt, whether from Greek voters rejecting budget cuts or panicked Spanish depositors withdrawing their life savings, make the likelihood of a cautious, deliberative process lower.

Ms. Merkel also raised on Monday the prospect of “specific European oversight” for systemically important banks as a long-term goal.

Nervousness within Germany, where record-low unemployment and borrowing rates have preserved a calm at the eye of the financial storm, has also begun to grow. Joschka Fischer, a former foreign minister, warned that “the European house is on fire,” and that Ms. Merkel, in her support for austerity policies, “prefers to douse it with kerosene rather than water.”

It is easy to demand a fix, the argument in the chancellery goes, but treaties and charters cannot simply be violated for expediency. “You cannot just sit on principles and say no all the time, but we have to understand where we are headed toward,” said Joachim Scheide, the head of the forecasting center at the Kiel Institute for the World Economy.

“Merkel is slowly adapting to different times because she is afraid of not jumping on the train in time,” said Stefan Kornelius, foreign editor of the German newspaper Süddeutsche Zeitung. “She doesn’t want to be the gravedigger for the euro.”

Reporting was contributed by David Jolly from Paris, Paul Geitner from Brussels, Jack Ewing from Frankfurt, and Annie Lowrey from Washington.

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