Merkel agrees multi-billion stimulus plan, rejects EU bonds

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German Chancellor Angela Merkel has resisted pressure for common eurozone bonds or a more flexible use of Europe's rescue funds but agreed with leaders of France, Italy and Spain on a €130 billion package to revive growth.

After four-way talks in Rome's Renaissance Villa Madama on Friday (22 June), Italian Prime Minister Mario Monti said the European Union should adopt pro-growth measures worth about 1% of the region's gross domestic product at a EU summit on 28-29 June.

But the three others made no perceptible progress in pushing Merkel, who leads Europe's most powerful economy and the main contributor to its rescue funds, towards mutualising Europe's debts or using existing bailout resources more flexibly.

"Growth can only have solid roots if there is fiscal discipline, but fiscal discipline can be maintained only if there is growth and job creation," Monti told a joint news conference after talks that lasted just an hour and 40 minutes.

The measures, already in the works in Brussels, include increasing the European Investment Bank's capital, redirecting unspent EU regional aid funds and launching project bonds to co-finance major public investment programmes. No new steps were announced on Friday.

The four leaders did agree to move ahead on creating a tax on financial transactions even though not all EU members will be on board. About a dozen EU states support setting up the so-called "Tobin tax", more than the nine required to go ahead as a group within the EU, a French presidential source said.

Merkel stands firm on Eurobonds

Merkel made no mention, however, of any move towards mutualising past eurozone debt or new borrowing.

French President François Hollande voiced impatience with Berlin's reluctance, saying it should not take 10 years to create jointly underwritten eurobonds.

He said greater solidarity was needed among member states before they abandon more sovereignty to EU institutions.

"I consider eurobonds to be an option … but not in 10 years," Hollande said in a direct challenge to Merkel. "There can be no transfer of sovereignty if there is not an improvement in solidarity."

The German position essentially amounts to the reverse. Merkel argues that members of the 17-nation currency union must transfer control over national budget and economic policies to Brussels before Germany would consider common debt issuance.

"Liability and control belong together," she said, citing as an example that EU treaties ruled out letting eurozone rescue funds lend directly to Spanish banks because only the Spanish state could enforce conditions on the banks.

The contrasting comments left much work for diplomats to produce a convincing blueprint for closer fiscal and banking union at a full EU summit on 28-29 June, which Monti called a defining moment in the crisis.

Guy Verhofstadt, leader of the liberal ALDE group in the European Parliament, expressed disappointment after the mini-summit.

"We seem to be wasting time going round in endless circles, waiting for someone else to make the first move. Francois Hollande is saying that we need more solidarity among member states before conceding more sovereignty to the EU whilst Angela Merkel will not countenance any more solidarity until there is agreement on further transfers of sovereignty to a full fiscal union!"

According to Verhofstadt, both are needed as a matter of urgency if Europe is to deal with the crisis efficiently.

"Monti and Rajoy both have their backs against the wall and will surely be pressing this point. If the crisis engulfs the Spanish and Italian economies, the price of rescuing them will far outstrip what is currently on the table. There is no excuse for any more hesitation.

"Next week's summit must reach agreement on a comprehensive road map to fiscal union as well as significant financial commitments to boost growth."

European Commission President José Manuel Barroso has said he will propose a roadmap and "calendar" for more European integration at the next summit of EU leaders on 28-29 June, without discarding the possibility of a treaty change aimed at injecting more federalism into the Union.

European Council President Herman Van Rompuy will present a report on 28 June exploring ways to deepen economic integration, including the subject of Eurobonds, which would pool part of European debt and reduce the borrowing costs of fragile economies like Spain or Italy.

  • 28-29 June: Formal EU summit in Brussels to finalise growth agenda and discuss "roadmap" for greater European integration.

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