Merkel defends concessions in euro crisis

Associated Press
German Chancellor Angela Merkel addresses lawmakers on the decisions of the EU summit at the parliament Bundestag in Berlin, Friday, June 29, 2012. Chancellor Merkel faces a vote on the eurozone's new permanent rescue fund and the EU's fiscal pact. (AP Photo/Markus Schreiber)
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BERLIN (AP) — Chancellor Angela Merkel defended concessions she made at a European Union summit, telling German lawmakers on Friday that help to struggling countries and banks will still come with strings attached and insisting that some decisions were misunderstood.

Merkel had been opposed, at least in the near term, to some of the measures that she and the other 16 leaders of the euro countries agreed on Friday. They include allowing Europe's bailout fund in future to give money directly to a country's banks, without imposing strict austerity conditions on the government.

German media headlines immediately after the summit portrayed the outcome as a political defeat, but Merkel said her tough-love approach was intact.

She spoke to lawmakers as they prepared to vote on approving Europe's German-pushed budget-discipline pact and its permanent rescue fund, the €500 billion ($623 billion) European Stability Mechanism — but not the summit decisions. Merkel made clear that those plans will also go to lawmakers at a later date.

Merkel told Parliament it was a "sensible decision" to allow countries that pledge to implement reforms and budget policies demanded by the EU's executive Commission to tap rescue funds without having to go through the kind of tough austerity measures demanded of Greece, Portugal and Ireland — a concession to Italy and Spain in particular.

Leaders were "very inconsistent" in explaining that, "which led to a lot of misunderstanding," Merkel said. She insisted it was only about helping countries whose financial stability is threatened by high interest rates but don't need to be taken off markets altogether.

She said there will always be conditions and a time frame, which will be supervised, and told lawmakers they should read the EU Commission's current economic policy recommendations for Italy and Spain — "they are tough conditions."

Germany's opposition leader, who had previously failed to convince Merkel to adopt such measures to ease fellow European countries' borrowing costs, welcomed her decision at the summit. But the Greens' Juergen Trittin couldn't resist drawing a parallel with Germany's 2-1 European Championship defeat by Italy on Thursday.

"She lost the game that was played in Brussels last night at least 2-1 against (Italian Premier Mario) Monti, if she scored a goal at all," Trittin said.

Merkel looked set to secure the required two-thirds majority for the budget-discipline pact, the fiscal compact, later Friday after winning the opposition's support last week by offering a greater emphasis on economic growth and support for a financial transaction tax. Similar backing looked likely for the ESM.

Heading in to the Thursday-Friday summit in Brussels, Merkel had appeared thoroughly uncompromising —insisting on the importance of getting budgets in order and improving eurozone strugglers' competitiveness while brushing aside talk of shared debt liability in Europe.

But in a victory for Spain and Italy, she agreed that funds set up to bail out indebted governments could be allowed to funnel money directly to stressed banks — once an "effective single supervisory mechanism" for banks is set up.

Merkel said that was a matter of "several months or perhaps a year" but that having an effective supervisor that could set and enforce conditions "changes the conditions for the question of how we can deal with banks in the eurozone."

EU President Herman Van Rompuy stressed that all involved will work speedily to have a draft of the necessary legal and institutional framework for a centralized banking authority by year's end.

Merkel made a "180-degree turn," tweeted Carsten Schneider, a prominent lawmaker with the center-left opposition Social Democrats.

But Merkel insisted that "we remain completely within our approach so far: help, trade-off, conditionality and control, and so I think we have done something important, but we have remained true to our philosophy of no help without a trade-off."

Markets cheered the agreement, with the DAX in Frankfurt closing up 4.3 percent, Spain's Ibex up 5.7 percent and Italy's FTSE-MIB up a stunning 6.6 percent. The euro rose 2 percent to $1.2680 and borrowing rates for Spain and Italy dropped sharply.

Despite the market cheer, Merkel faced criticism in the media, where her hard-nosed approach to crisis management has been popular.

Under the headline "Merkel buckles," the Bild newspaper argued that the summit decisions "mark a turning point in crisis policy" and said that "Merkel gave up her hard position." The top-selling daily paper has been a cheerleader for a tough approach.

Leading news website Spiegel Online headlined a story on the summit: "The night in which Merkel lost," while Die Welt newspaper wrote of "Merkel's defeat in a historic night."

Still, Carsten Brzeski, an economist at ING in Brussels, noted that moves such as recapitalizing banks directly are still subject to some conditions and there was no immediate decision to help out Italy.

"The only real concrete decision taken ... is the start of a single bank supervision," he said. "In the end, the German principle of conditional integration is still intact."

"Short-term relief for Spain and Italy, however, remains very cryptic and limited," Brzeski said.

Analysts also noted that the amount of money available in the rescue fund, or ESM, is dwarfed by the amount of debt across the continent. Italy alone has outstanding debt of €2.4 trillion.

European leaders also agreed at the summit that bonds purchased by the rescue fund for Spain's bailout will no longer enjoy preferential treatment to other bondholders in case of a default.

Previously, they looked set to enjoy "senior" status, which had the unintended consequence of scaring private investors away. Merkel insisted that was a one-time move that won't affect future moves by the ESM.

And she made clear that her opposition to moving soon to jointly issued eurobonds remains unchanged. Experts say eurobonds would help weaker countries like Spain by spreading their debt risk across multiple countries.

But Germany worries about being exposed to that new debt and says eurobonds would remove pressure on weaker countries to reform their economies by cutting red tape, fighting tax evasion and lower business costs.

Leaders delayed their discussion of such long-term issues until October.

Van Rompuy and other senior EU officials had laid out a vision for the future make-up of the eurozone in a sweeping document presented before the summit. It includes share debt and giving up national powers over budgets to a central authority.

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Juergen Baetz in Berlin contributed to this report.

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