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European plan tries to convince Germany to do more

It aims to centralize some control to aid ailing debtor nations

By Toby Sterling and Don Melvin

Associated Press

Published: Tuesday, June 26 2012 8:55 p.m. MDT

The Reichstag building, house of German parliament Bundestag in Berlin, Tuesday, June 26, 2012. German parliament will vote on the European Stability Mechanism, ESM, and the EU fiscal compact on Friday, June 29. (AP Photo/Markus Schreiber)

Associated Press

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BRUSSELS — Top European officials have called on countries that use the euro to surrender more control over their national budgets, a move apparently aimed at easing Germany's fears of sharing debt burdens with struggling governments like Spain or Italy.

The plan is meant to be a grand vision to save the euro currency from financial disaster and to set up negotiations between leaders at a key European Union summit on Thursday.

Germany, Europe's biggest and strongest economy, is increasingly isolated in its refusal to quickly adopt measures such as jointly issued eurobonds, which would see it take on some of the debt risk of financially weak countries. Some experts say such debt-sharing is what Europe needs to end its crisis as it would help defuse the prospect of unaffordable bailouts for Spain or Italy.

But Germany is worried that such debt-sharing would tempt financially weak countries to spend irresponsibly once again and not reform their economies. Reassuring Berlin that governments would face tough oversight of their budgets would be key to easing Germany's resistance to debt-sharing.

"What is at stake is ... the overall confidence in the euro area, and indeed in our commitment to the European project," European Commission President Jose Manuel Barroso told reporters in Brussels. "For a genuine economic and monetary union to be established, I think we need a banking union, a fiscal union and further steps toward a political union."

The plan was drawn up by the "gang of four" top European officials: Barroso along with Council President Herman Van Rompuy, Eurogroup President Jean-Claude Juncker and European Central Bank President Mario Draghi.

It is doubtful whether eurozone governments will be willing to cede control over their budgets and whether citizens of European countries would accept the idea even if their leaders sign off on the idea.

The plan is to be debated by leaders from around Europe at a Brussels summit Thursday and Friday that takes place against a backdrop of financial strains that are threatening to shatter the single currency.

On Monday, Spain requested financial help to recapitalize its banking industry, and yields on Spanish and Italian government bonds are rising toward levels that forced the governments of Greece, Portugal and Ireland to seek bailouts. But Spain and Italy are widely considered "too big to bail" — even for Germany.

The plan proposes a "medium term" move toward eurobonds, as well as creating a banking union with a single authority. This authority, probably the ECB, would have the power to shut insolvent banks and insure deposits, with help from Europe's permanent bailout fund.

Though the plan is similar to those put forward by the International Monetary Fund and French President Francois Hollande, it was not embraced by Germany.

Chancellor Angela Merkel told a meeting of her party Tuesday afternoon that she would not accept full debt-sharing "as long as I live." A lawmaker who was present confirmed the remarks to the Associated Press, on condition of anonymity, but noted that she was referring to a full sharing of all national debts. Her office declined to comment.

Despite her strong words, Merkel has during the course of the European crisis accepted measures she had previously ruled out. She had opposed having a permanent rescue fund for Europe, for example, before then accepting it.

Even if rejecting eurobonds in all but the longest time frame is only a negotiating stance, it is clear that Merkel and her finance minister Wolfgang Schaeuble oppose debt-sharing until countries have carried out reforms or credibly committed to do so, and the Eurozone has become better integrated than it is now. It is less clear how they believe the monetary union can survive its current stress to get to that point.

Merkel herself has said the solution to the crisis lies in "more Europe" in the form of better central controls.

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