THE German government has begun opening the door to shared debts in a profound change of policy, agreeing to explore proposals for a €2.3 trillion ($2.9 trillion) stabilisation fund to stop the eurozone’s crisis escalating out of control.
Officials in Berlin say the Chancellor, Angela Merkel, is willing to drop her opposition to plans for a ”European Redemption Pact”, a ”sinking fund” that would pay down excess sovereign debt in the eurozone.
”It is conceivable so long as there is proper supervision of tax revenues,” a source in the Chancellor’s office said. The official warned there would be no ”master plan” or major breakthrough at the European Union summit later this month.
Dr Merkel rejected the pact in November as ”totally impossible”, even though it was drafted by Germany’s Council of Economic Experts and is widely viewed as the only viable route out of the impasse. Fast-moving events may have forced her hand. She is under immense pressure from the US, China, Britain and Latin Europe to change course as the crisis engulfs Spain and Italy, threatening a global cataclysm.
The European Commission’s chief, Jose Manuel Barroso, said Europe faced a ”social emergency”. ”We must recognise that we have a systemic problem. I am not sure the urgency of this is fully understood in all the capitals,” he said in a thinly veiled attack on Berlin.
Yields on 10-year Spanish debt hovered at danger levels just under 6.8 per cent on Wednesday on doubts that the EU’s €100 billion rescue for the country would be the end of the story, with drastic knock-on effects in Italy.
”The crisis will inevitably roll on to the next domino, and that is Italy,” said Simon Nixon, from Societe Generale.
Rome had to pay 3.97 per cent to raise €6.5 billion of 12-month debt this week, compared with 2.34 per cent last month. ”I feel very sorry for Italy,” Andrew Roberts, the credit chief at RBS, said. ”They have done the hard work over the years and have a cyclically adjusted surplus. This is pure contagion.
”The fact that the rally lasted just two hours after Spain’s bailout is very corrosive. We are now accelerating into the endgame. Either we have fiscal pooling of one sort or another or we are heading straight into euro exits and defaults.”
Italy’s Prime Minister, Mario Monti, told the Italian parliament on Wednesday he expected the redemption pact to be ”on the table” at the EU summit, even if it did not come into force immediately.
In Germany, the opposition Greens and Social Democrats both back the plan. Dr Merkel cannot ignore them since she needs their votes to ratify the EU Fiscal Treaty, which requires a two-thirds majority.
The redemption pact covers all public debts of Economic and Monetary Union states above the Maastricht limit of 60 per cent of gross domestic product, roughly €2.3 trillion. The idea is to treat the first decade of monetary union as a learning experience and allow a fresh start. The excess debt would be paid down over 20 years. The beauty of the proposal is that this would return Europe to the Maastricht discipline where each state is responsible for its own debts. It is the exact opposite of fiscal union.
Officials at Germany’s top court say it appears compatible with the country’s constitution – unlike eurobonds. There would be a limit to costs and the fund would not endanger the tax and spending sovereignty of the Bundestag. The debt would be covered by bonds, paid for by a designated tax. Each country would be responsible for its own share of debt – Italy €960 billion, Germany €580 billion, France €500 billion and so forth – but would issue bonds jointly.
It is not yet clear whether Dr Merkel can persuade her party to support the pact. Her Finance Minister, Wolfgang Schauble, poured cold water over the idea earlier this week.
Experts say this overlooks the tough conditionality. Italy and other states would have to pledge gold and other forms of collateral equal to 20 per cent of their debt in the fund.
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