Merkel Raises Questions About Bigger Bailout Fund

In Davos, the German leader said she doesn’t want to promise something that she can’t back up.

German chancellor Angela Merkel on Wednesday deflected calls for expansion of Europe’s sovereign bailout fund and insisted that further economic integration in the eurozone was necessary to restore market confidence.

At the World Economic Forum in Davos, Switzerland, the chancellor said the currency union “must be ready to dare more Europe.”

We will have to get used to the fact that the European Commission, which already has lots of competences, will become more and more like a government.

Germany and other strong economies in the north of the continent want to empower the commission to penalize member states that disregard European debt and deficit limits. France, Italy and other nations in the south would rather keep this authority in the hands of political leaders.

The German leader said she didn’t believe that a bigger European rescue fund for profligate nations could solve the crisis. She acknowledged that despite last year’s expansion of the European Financial Stability Facility, when the vehicle’s effective lending capacity was increased to €440 billion, there is pressure to expand it again. “Now they say it should be twice as big,” she lamented.

Some say, “it should even be three times as big, then we’d really believe you.” And I always ask myself how long is that credible and when is that no longer credible?

What Germany doesn’t want, she added, “is a situation in which we promise something we can’t back up in the end.”

Germany may be considered the strongest economy in the eurozone but it, too, has to borrow to finance public spending while its debt has grown to a size that is equivalent to more than 80 percent of gross domestic product.

According to the 1997 Stability and Growth Pact, which applies to countries both in and outside of the single-currency union, government debts should not exceed 60 percent of GDP while deficits are to remain under 3 percent of GDP. Few countries have managed to meet these targets in recent years.

Whatever the size of Europe’s rescue fund, there will likely continue to be doubt about Germany’s willingness to prevent countries like Greece from defaulting.

Within Finland, Germany and the Netherlands, which are the only eurozone countries whose creditworthiness is still rated AAA by all major credit rating agencies, there is mounting opposition to financing the deficit spending of others.

Merkel’s rejection of a bigger “firewall” to stem Europe’s spiraling debt crisis came days after the managing director of the International Monetary Fund had warned that “across the board, across the continent, without differentiation, budgetary cuts will only add to recessionary pressures.”

Christine Lagarde, the former French finance minister, fears that strict and immediate fiscal consolidation will undermine the fragile global recovery. Merkel’s priority is to reduce deficits in the short term and improve competitiveness in the periphery of the eurozone in the long run.