Germany, France Face Opposition on Debt-Crisis Exit Strategy – BusinessWeek

On February 4, 2011, in Latest News, by ayesha

February 04, 2011, 3:27 PM EST By James G.

February 04, 2011, 3:27 PM EST

By James G. Neuger and Stephanie Bodoni

Feb. 4 (Bloomberg) — Germany and France met resistance to calls for closer coordination of tax, wage and pension policies, stumbling in their effort to lead Europe out of the debt crisis.

The euro area’s two top economic powers were forced to scale back a proposed “pact for competitiveness” that would flank more immediate steps — themselves still under dispute — to put an end to the year-old fiscal trauma.

Leaders weighed holding an extra summit in March to bridge the economic-management divide and resolve disagreements over the expanded use of the 440 billion-euro ($600 billion) rescue fund for debt-strapped countries.

“We discussed it not in depth,” EU President Herman Van Rompuy told reporters after a summit in Brussels today. “There was certainly not a proposal by France and Germany, a concrete proposal.”

No final decision was made on the German and French call for a 17-nation euro summit next month. It could come as late as the eve of the next scheduled meeting of all 27 EU leaders on March 24.

Signs of discord helped snuff out a three-day rally in European bond markets yesterday and knocked the euro off a three-month high, as investors questioned when Europe will come up with an anti-crisis formula. The euro fell for a third day today, weakening as much as 0.5 percent to $1.3568.

Pacific Investment Management Co. is steering clear of bonds from some peripheral European countries until a reform strategy emerges, said Mohamed El-Erian, chief executive officer.

‘Not Yet’

“We’re not yet buying Greek or Irish bonds or Portuguese,” El-Erian said at the Munich Security Conference. “I say ‘not yet’ because, as I say, we’re hoping that efforts will continue” with issues such as liquidity, debt overhang and competitiveness.

European leaders gave no indication whether they are closer to retooling the rescue fund, with Germany holding out against a French-backed proposal for repurchases that would enable high- debt countries to buy their own bonds at a discount on the market.

German opposition to buybacks, which would pare the debt burden of countries like Greece, reflects an unwillingness to pump more cash into the fund, known as the European Financial Stability Facility.

Instead, the focus is on mobilizing the full potential of the fund, now able to lend only about 250 billion euros due to collateral rules that underpin its AAA credit rating.

Main Mission

The European Central Bank, which has propped up markets by buying 76.5 billion euros of struggling countries’ bonds, is looking to hand over that job to governments as it pivots to its main mission of combating inflation.

The rescue fund must “be as flexible as possible and also to be as effective as possible in terms of magnitude,” ECB President Jean-Claude Trichet said yesterday.

While direct purchases of distressed countries’ bonds in the primary market are likely to be part of the EFSF’s upgraded toolkit, other pieces — such as Ireland’s plea for lower interest rates on aid — have yet to fall into place.

Germany, the biggest of the 17 euro nations, is tying its approval of a stepped-up rescue effort to a toughening of controls on budget shortfalls that have gone unenforced since the euro’s birth in 1999.

“The year 2010 was a year of trials for the euro,” German Chancellor Angela Merkel said. “Germany and France are firmly committed that 2011 will be the year of new confidence for the euro.”

Competitiveness Proposal

Merkel’s competitiveness proposal calls for debt-limitation rules in national constitutions, a revival of EU plans to harmonize the corporate-tax base, the abolition of wage indexation and promises to clean up the banking system.

European Commission experts have been examining ways of standardizing the company tax base for years, running up against technical hurdles and objections from countries like Ireland, home to a 12.5 percent business-tax rate.

“On a question like corporate taxes, it doesn’t mean that a country like Ireland has to have the same rates as the others, but let at least get together to make sure we are talking about the same tax base,” French President Nicolas Sarkozy said.

The competitiveness discussion — an echo of Europe’s existing “2020” plan to boost growth — hasn’t gone beyond basic principles. A French official told reporters that there is no question of further raising France’s retirement age after it was lifted to 62 from 60 last year.

Wage-Indexation Policies

Luxembourg and Belgium rebelled against suggestions that they might be forced to scrap wage-indexation policies that automatically lift workers’ salaries in line with inflation.

Annual cost-of-living increases haven’t pushed labor costs beyond European averages, leaders from the two countries said.

“Indexation won’t be annulled in Luxembourg,” Prime Minister Jean-Claude Juncker said. “I made that clear.”

The conflicts risk fracturing Europe into a two-tier economy, with fiscally prudent northern countries posting trade surpluses and weaker southern economies being submerged by debt, billionaire investor George Soros said.

“The structure that’s being currently discussed will cast that divergence in stone,” Soros said at the Munich conference.

–With assistance from Gregory Viscusi, Jonathan Stearns, Rainer Buergin, Flavia Krause-Jackson and Gonzalo Vina in Brussels, and Patrick Donahue and Tony Czuczka in Munich. Editors: James Hertling, Jones Hayden

To contact the reporters on this story: James G. Neuger in Brussels at; Stephanie Bodoni in Brussels at

To contact the editor responsible for this story: James Hertling at

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