Merkel May Be Persuaded on Euro Debt-Sharing

Chancellor Merkel left the door open to a compromise on debt sharing in the euro area as Italian Prime Minister Mario Monti said he can help bring Germany round to acting in Europe’s “common good.”

Merkel’s veto on allowing Germany to underwrite joint debt issuance in the 17-nation euro region is under fire from her international partners as well as the domestic opposition. While she refused to back joint euro-area bonds at a Brussels summit on May 23, Germany’s opposition parties wrung a concession from the chancellor on her return to Berlin yesterday to reconsider a separate proposal on common liability for sovereign debt.

The blueprint, published in November by Merkel’s council of economic advisers, involves a so-called European redemption fund that would help governments scale back outstanding debt to below 60 percent of economic output in return for constitutional commitments on economic reform. The government and opposition agreed to study the fund and discuss it further on June 13.

“The concept amounts to a third way to tackle the euro area’s debt mountain,” Peter Bofinger, a professor of economics at the University of Wuerzburg and one of the proposed fund’s architects, said today by phone. “Euro bonds have a dreadful press and are evidently unacceptable to Germany. What’s overlooked by the fund’s critics is that it is temporary and has built-in inducements on states to run sound budgets. I don’t know right now whether the concept will be adopted, but it deserves earnest consideration.”

Bloomberg

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