Merkel Pushes EU Toward Stricter Fiscal Limits, Heeding Draghi’s Demands

23.01.2012 13:14

Bloomberg: European Union governments returned to German Chancellor Angela Merkel’s agenda for fighting the debt crisis as they tightened draft rules on budget deficits, heeding European Central Bank warnings against backsliding.
The latest draft of the fiscal pact, to be discussed Jan. 23 by EU finance ministers, bows to ECB President Mario Draghi’s call for governments to honor their commitment on spending discipline to restore credibility in the euro area. Placating the ECB may be critical to policy makers’ efforts to contain the debt crisis, now in its third year.
The central bank “will like it enough to continue with their current policy” of providing banks “with enormous amounts of liquidity in hopes they will survive and also buy some government bonds,” Carsten Brzeski, an economist at ING Group in Brussels, said yesterday in a phone interview.
The proposed treaty will require a centralized “correction mechanism” to be triggered “automatically” in cases of “significant” deviations from a target structural deficit of 0.5 percent of gross domestic product, according to the draft dated Jan. 19 obtained by Bloomberg News. Reflecting German demands, countries would have to enact “binding and permanent” balanced-budget rules.
Germany will probably sign off on the provision even though it doesn’t force EU countries to put the debt limits into their constitutions as Germany has, said Brzeski.
‘What She Wants’
“I don’t know what more the Germans could ask for in terms of the debt brake,” he said. “Merkel is finally getting what she wants in Europe.”
Merkel, as the leader of Europe’s biggest economy, has joined with French President Nicolas Sarkozy to put stiffer rules on deficit control at the heart of Europe’s efforts to combat the debt crisis. Of the EU’s 27 states, only the U.K. has refused to sign up to the pact, which Merkel has said she wants to be drafted by the end of this month and signed in March.
ECB Executive Board member Joerg Asmussen, a former German deputy finance minister who used to advise Merkel during EU summits, requested “substantial changes” to the fiscal-treaty draft on Jan. 12, saying the measure should include “ambitious and binding calendars” for meeting new budget goals, as well as an automatic correction mechanism. These changes are reflected in the new draft.
Draghi warned as recently as Jan. 19 that governments must follow through on their “breakthrough” commitment made at a December summit to draw up a credible fiscal pact.
‘Back on Course’
“It is now important to swiftly implement all of those decisions to put the euro-area economy back on course,” Draghi said at an event in Abu Dhabi.
The central bank stepped in on Dec. 21 and offered the region’s banks a record 489 billion euros ($633 billion) in three-year loans so they can keep lending. Sarkozy suggested that banks also use the money to buy euro-area sovereign bonds.
Finance ministers meeting in Brussels on Jan. 23 will also discuss a separate draft accord on Europe’s planned permanent rescue fund that eases earlier provisions on debt restructurings. The proposed agreement still calls for clauses in bond contracts that would prevent small clusters of investors from blocking a restructuring, while deeming writeoffs “exceptional” and subject to International Monetary Fund standards, according to a draft text.
Greek Bailout
Also on the agenda is a second financing package for Greece ({GDBR10), where the sovereign debt crisis first came to light in late 2009 before moving on to menace Italy, Spain and France. Greece faces a 14.5 billion-euro bond payment on March 20. Key to the new bailout package is a debt-swap deal between Greek officials and private creditors, who continued negotiations in Athens yesterday.
The fiscal treaty gives the European Court of Justice the power to fine countries whose balanced-budget laws don’t pass muster, while stopping short of the ECB’s request that the court more broadly enforce the budget rules, the draft shows.
To ensure the pact enters into force, Merkel needs the support of her coalition to pass the treaty in the German parliament. Some coalition lawmakers who complained last week that EU negotiators were watering down the rulebook welcomed the latest revisions.
“What’s decisive from my point of view is not the question of constitution, yes or no, but whether we achieve a legal format in the individual states that can’t be overwritten in the annual budget drafting process,” Michael Meister, deputy floor leader for Merkel’s Christian Democratic Union, said on Deutschlandfunk radio today.
Sanctions with “an automatic character” are needed to have any effect, “and any easing of budget rules is an open invitation to break them,” Michael Fuchs, the CDU’s economic affairs spokesman in parliament, said by phone today. “The draft had to be changed.”
reporters on this story: Tony Czuczka in Berlin ,Brian Parkin in Berlin
editors responsible for this story: James Hertling