Merkel, Sarkozy to Move Forward on Euro Rescue Plan

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Merkel, Sarkozy Unite on EU Revamp as S&P Warns on Ratings

December 06, 2011, 5:20 AM EST By Patrick Donahue and Helene Fouquet

(Updates euro price in seventh paragraph, Juncker comments in eighth. For more on the European debt crisis, see EXT4.)

Dec. 6 (Bloomberg) -- German Chancellor Angela Merkel and French President Nicolas Sarkozy strengthened their push for new rules to tighten euro-area economic cooperation as Standard & Poor’s said it may downgrade credit ratings across the region.

Hours after meeting in Paris yesterday, the leaders of Europe’s two biggest economies responded that they “took note” of the move by S&P, while both countries “reinforce their conviction” that common proposals for closer fiscal union in the European Union will lead the way out of the crisis.

“The actions of the last three years have shown that the euro zone governments are not prepared to act collectively in a way that convinces markets,” said Paul Donovan, deputy head of global economics at UBS AG in London. The S&P move “may perhaps heighten the desirability of coming out with a compelling solution for the French and the Germans.”

Germany and France risk losing their AAA credit ratings in a review of 15 euro nations for possible downgrade, S&P said. At an earlier meeting in Paris, Merkel and Sarkozy said both countries were aligned on backing automatic penalties for deficit violators and locking limits on debt into euro states’ constitutions. Investors say such moves might pave the way for the European Central Bank to do more to fight the debt crisis.

ECB Focus

The question is whether the Franco-German push toward integration is enough to prompt ECB President Mario Draghi to step up the central bank’s response, said Carsten Brzeski, an economist at ING Group in Brussels.

While the leaders’ announcement is “a good start to the week of truth,” Merkel and Sarkozy still “need to put money where their mouth is and bring everyone else on board,” Brzeski said by phone. “From a financial market perspective, it’s about them doing enough to deliver Draghi’s fiscal compact.”

The euro fell 0.4 percent against the U.S. dollar, trading at $1.3343 at 9:15 a.m. Frankfurt time -- down from an intraday high of $1.3487 yesterday as the S&P’s warning doused optimism over joint action by euro leaders. S&P put European nations including the six AAA-rated countries on watch for potential downgrades pending the outcome of a Dec. 9 summit of EU leaders.

‘Excessive’

Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of euro-area finance ministers, said the warning by the rating company was like a “knockout blow” to governments that are undertaking measures to scale back deficits.

“I have to wonder that this news reaches us out of the clear blue sky at the time of the European summit -- this can’t be a coincidence,” Juncker said in an interview today on German radio broadcaster Deutschlandfunk.

The S&P move was “excessive,” said Vincent Truglia, managing director at New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody’s Investors Service, a rival rating company.

“Countries like Germany, Luxembourg, Netherlands, Finland are AAA, and Austria is a pretty strong AAA,” he said.

S&P said that ratings could be cut by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and by up to two notches for the other governments.

The other countries warned are Estonia, France, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain, according to S&P. The company said it maintained the negative outlook for Cyprus, and Greece wasn’t put on “creditwatch.”

‘United’ Resolve

With the fate of the currency shared by the 17 euro states at risk, Merkel and Sarkozy are stressing their common platform going into the summit that aims to end the crisis that’s now in its third year. After Merkel compared the mission to a “marathon” last week, Sarkozy said yesterday that euro leaders would go on a “forced march” to win back confidence.

Among the measures announced were plans to fast-track the euro’s permanent rescue fund to 2012, one year earlier than envisaged. Germany and France will also seek to ensure that decisions by the fund, the European Stability Mechanism, can be made by a “qualified majority” rather than a unanimous vote by the participating governments. Sarkozy said they aimed to reach consensus on treaty change with other euro leaders by March.

“We don’t have time -- we are conscious of the gravity of the situation,” Sarkozy said after meeting with Merkel over lunch at the Elysee palace. “We want to go as fast as possible based on this agreement between France and Germany, which is open to others.”

Response

Safeguarding banks, limiting the damage to Italy and Spain and finding additional rescue funds may hinge on the response to Franco-German demands for closer economic integration and tougher policing of fiscal rules.

Draghi signaled last week that should a “new fiscal compact” emerge among the euro nations, “other elements might follow.” Merkel and Sarkozy both declined to comment on Draghi’s comments, stressing the ECB’s independence.

“It’s a step in the right direction for the ECB but we’ll want to know how the automatic sanctions are triggered,” said Klaus Baader, co-chief economist at Societe Generale SA. “When France and Germany have joint press conferences and say we agree on everything you have to take that with a pinch of salt.”

With the EU summit looming, U.S. Treasury Secretary Timothy Geithner arrives in Frankfurt to meet with Draghi and Bundesbank President Jens Weidmann before heading to Berlin for talks with German Finance Minister Wolfgang Schaeuble. The ECB holds a policy meeting on Dec. 8.

‘Bit of Trust’

European leaders will seek to “win back a bit of trust” at the summit after “our reliability has suffered,” Merkel said in Paris. “We are steadfastly determined to make the decision at the council now.”

Merkel and Sarkozy yesterday repeated their rejection of jointly sold euro bonds in solving the crisis, while seeking to calm concerns of euro-area member states that the European Court of Justice would be able to veto national budgets as part of their proposal for centralized deficit supervision.

With euro bonds ruled out, “the onus is still on the ECB to print money to make huge loans or bond purchases and draw a line under the crisis,” said Jennifer McKeown, senior European economist at Capital Economics in London.

The move by S&P adds impetus to that, said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

“Anything which impacts the perceived creditworthiness of the main guarantors of euro zone debt is bad news for planned steps towards a fiscal union,” he said in an e-mail. “All this puts more pressure on the ECB to hold the fort.”

--With assistance from Zoe Schneeweiss in Vienna, Mark Deen, Albertina Torsoli and Gregory Viscusi in Paris, Tony Czuczka and Alan Crawford in Berlin, Jeff Black in Frankfurt and Simon Kennedy in London. Editors: Leon Mangasarian, Simone Meier.

To contact the reporters on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net; Helene Fouquet in Paris at hfouquet1@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net

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Merkel Risks Revolt Over Greece as FDP Ally Splits on Aid Terms

May 14, 2011, 9:25 AM EDT By Brian Parkin

May 14 (Bloomberg) -- Chancellor Angela Merkel faces a gathering storm in her coalition over Germany’s share of euro- area rescues, threatening to undermine her ability to make concessions on additional help for Greece.

Merkel’s Free Democratic Party coalition partner signalled a hardening of its stance on aid at a convention today, calling for penalties on bailout recipients that miss debt-reduction targets. A leading FDP rebel said that as many as 50 coalition lawmakers are ready to reject the post-2013 euro rescue fund when it goes to parliament, enough to make Merkel reliant on opposition votes.

“We know that public acceptance of European topics is dwindling,” Economy Minister Philipp Roesler told FDP members in the Baltic Sea port of Rostock in his first speech as party leader. Aid appraisals must be based on “clear conditions with sanctions for failure to adhere to rules,” he said. Financial help “cannot be a one-way street.”

One year after she agreed to aid Greece to save the euro, Merkel must again balance domestic resistance to bailouts with the need to tackle a resurgence of the debt crisis where it started. The euro fell to a six-week low against the dollar on concern Greece may have to restructure its debt even as European finance ministers prepare to discuss further support on May 16.

Eighty-five percent of international investors surveyed by Bloomberg this week said Greece will probably still default on its debt. Greek two-year notes rose to a record 26.77 percent on May 12 amid restructuring speculation before declining to 24.99 percent yesterday.

Debt Crisis Dilemma

A motion debated in Rostock today and backed by the FDP leadership demanded that investors share the bill for any aid given to indebted states, saying that “in no case whatsoever” can the German public assume the debts of other countries.

The Free Democrats, one of three parties in Merkel’s coalition, are struggling to present a united front on the debt crisis as factions demand harsher conditions on debt-wracked states including their possible ejection from the euro. Others see that as anathema for the party of Hans-Dietrich Genscher, the foreign minister who oversaw German reunification in 1990 after the fall of the Berlin Wall and who went on to symbolise European unity.

“We’re at a crossroads,” Otto Fricke, the FDP’s budget spokesman in parliament, said in an interview. “We can either take the populist anti-euro road that some are advocating, or work on becoming a byword for economic stability and common sense, be it over tax cuts, budget discipline or the euro.” The FDP “needs to show we’re the other voice in the coalition, and that may mean taking a tougher stance on the debt crisis where necessary.”

‘Going Badly Wrong’

FDP lawmaker Frank Schaeffler, who last year called for Greece to sell its islands to cut debt and who favors ejecting states from the euro “at short notice” in cases of rule breaking, said that “a good many Free Democrats share the view in private that something is going badly wrong in solving this crisis.”

As many as 50 coalition lawmakers are prepared to join his revolt against the European Stability Mechanism due to take over from the current rescue fund in mid-2013. That’s an increase of at least 10 votes in the past three weeks, enough to eliminate Merkel’s 41-seat majority over the opposition when the ESM goes to a vote after the summer recess. “A year ago I was isolated in the party,” Schaeffler said. “That’s no longer the case.”

The bailout skeptics aim to tap a vein of resentment that’s brewing in Germany and other AAA-rated countries such as Finland over being forced to bail out their euro-area neighbors.

Poll Ratings

Twenty percent of Germans view Merkel’s decision last year to help Greece as “right,” according to a poll published May 8 by consumer survey company GfK SE. Another 47 percent of respondents said the decision was “wrong,” suggesting that Merkel’s coalition may struggle to justify any additional aid.

The Free Democrats, who won a record 14.6 percent in the September 2009 federal election to enter Merkel’s second-term government, are battling to re-inflate their ratings after support collapsed amid bickering over policy, an unpopular leadership and failure to deliver their core policy of tax cuts.

FDP backing rose one percentage point to 5 percent, the threshold for seats in parliament, an Infratest poll for ARD television showed yesterday. While Merkel’s CDU still placed first with 33 percent, the FDP’s weakness means the coalition trails the opposition Social Democrats and Greens by 38 percent to 48 percent.

The FDP “won’t garner points by fanning anti-euro sentiment,” Hans-Juergen Hoffmann, head of the Psephos polling company, said by phone. “That’s not credible from a party that has so long been an advocate of European unity.”

The Free Democrats remain committed to the euro and the idea of European integration, “whatever a minority of critics say,” Werner Hoyer, deputy foreign minister and an FDP lawmaker, said in an interview in Rostock.

The party divisions “are damaging to our efforts to tackle this crisis” and the new leadership elected this weekend “will make this clear,” Hoyer said. “The euro’s stability architecture has holes, but we can plug them.”

--Editors: Alan Crawford, Francis Harris

To contact the reporter on this story: Brian Parkin in Rostock, Germany at bparkin@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Merkel Says ‘Could Back’ Draghi as Trichet’s Successor at ECB

May 11, 2011, 7:00 AM EDT By Rainer Buergin

(Updates with euro in fifth paragraph.)

May 11 (Bloomberg) -- German Chancellor Angela Merkel signaled her backing for Mario Draghi as the next president of the European Central Bank, leaving the Bank of Italy governor unopposed by Europe’s political leaders.

“I know Mario Draghi,” Merkel told Die Zeit newspaper in an interview published today. “He’s a very interesting and experienced person. He’s very close to our ideas of the stability culture and solid economic policy. Germany could support his candidacy for the office of the ECB president.”

Merkel’s remarks, her first to mention a candidate for the ECB post by name, were confirmed by the Chancellery and by her chief spokesman, Steffen Seibert.

Germany is the last of the four biggest euro-region countries to endorse Draghi after French President Nicolas Sarkozy told Italian Prime Minister Silvio Berlusconi on April 26 that he would back an Italian. Spanish Finance Minister Elena Salgado called Draghi an “excellent candidate” the next day.

The euro failed to react as the news broke today. It was up 0.25 percent to $1.4392 as of 12:26 p.m. in Berlin.

Euro area finance ministers tentatively plan to make the ECB nomination when they meet in Brussels on May 16. Germany has previously signaled that European leaders will make a decision on an ECB candidate at a June summit.

Weber Pulls Out

Draghi became the frontrunner in February when Germany’s contender, then-Bundesbank President Axel Weber, pulled out of the race to succeed Jean-Claude Trichet at the ECB. Jens Weidmann, formerly Merkel’s chief economic adviser, took over at the helm of the Bundesbank this month.

Draghi’s candidacy is a done deal in Merkel’s coalition, a government official said in Berlin on condition of anonymity because of the sensitivity of the matter. The government’s main concern is having a candidate in place who will represent German interests and Draghi fits the bill, the official said.

The eight-year term of the ECB’s current president ends in October, creating an opening at the top of the world’s second- most powerful central bank after the U.S. Federal Reserve. While Germany alone cannot dictate who wins the post, its status as Europe’s largest economy and biggest guarantor of aid to peripheral euro countries make it the dominant voice in the appointment.

Debt Crisis

Draghi will inherit an ECB very different to the one that Trichet took over in November 2003. As ECB president, Draghi will have to eventually steer the central bank out of a sovereign debt crisis that that forced it to take the unprecedented steps of buying government bonds, a move some council members said jeopardizes its independence.

The ECB is also trying to convince politicians that Greece can’t be allowed to restructure their debts, a move that Executive Board member Lorenzo Bini Smaghi says could see part of the Greek banking system collapse.

At the same time, Draghi will also have to convince investors and voters that he can fulfill the ECB’s primary mandate and get inflation under control. Germany’s biggest- selling Bild newspaper earlier this year raised questions about whether an Italian could be trusted to get a grip on prices given the country’s inflationary history. The newspaper last month backed Draghi’s campaign, saying that Merkel wanted to support “the most German of the remaining candidates.”

Inflation accelerated to 2.7 percent in April, the fastest pace in 2 1/2 years and the ECB raised interest rates in that month for the first time in three years.

MIT-Trained

Draghi, a Massachusetts Institute of Technology-trained economist, has worked at the World Bank and Goldman Sachs Group Inc. He is also chairman of the Financial Stability Board, which was established by the Group of 20 nations in 2009 to oversee development of standards to strengthen global regulation.

In a sign Draghi understood the need to meet German skepticism head on, he appealed to the German inflation-fighting mindset, saying on April 13 that monetary policy is still “accommodative” even after the ECB raised its benchmark rate on April 7.

In February, he told newspaper Frankfurter Allgemeine Zeitung that Germany is an example for other nations, calling for tougher sanctions for budget-rule breaches and vowing to ensure price stability.

--With assistance from Brian Parkin, Tony Czuczka and Patrick Donahue in Berlin and John Fraher in London. Editors: Alan Crawford, Leon Mangasarian

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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