Merkel: ‘Disastrous’ to stop Europe’s structural reform path
BERLIN (AFP) ― German Chancellor Angela Merkel Tuesday hailed Spain’s request for a banking bailout but stressed it would come with strings attached, as she warned Europe that halting reforms would be “disastrous.”
In a speech to members of her conservative CDU party, Merkel also said Europe was at a crossroads and reaffirmed her opposition to eurobonds as well as to taking on more debt as a response to the crippling eurozone crisis.
“There will of course be conditionality for Spain, when the application comes, namely a restructuring of its own banking system to make it fit for the future,” Merkel said, noting that it was “different from the conditionality in force when a whole country comes under the bailout fund with its entire economic program.”
At the weekend, Spain clinched a loan of up to 100 billion euros ($125 billion) to rescue its embattled banking sector.
While the reforms demanded in exchange will be overseen by a so-called “troika” of officials from European institutions and the International Monetary Fund, Merkel was at pains to stress Spain was different to previous bailouts.
“I am full of recognition for what has been done in Portugal and in Ireland and for what the Spanish prime minister is now doing in terms of macro-economic reforms,” added Merkel.
“I think it is right that Spain is now applying to recapitalize its banks, because the banking problems have not been caused by the state of the economic reforms but by a property bubble over the past decade,” she added.
Merkel said problems encountered by the European Banking Authority, which conducted Europe-wide stress tests of risky banks, showed the need for more centralized control at EU level.
The EBA relied on national oversight authorities who provided results as positive as possible “out of misguided national pride,” she charged.
In a wide-ranging speech on European policy, Merkel said Germany was “ready to do more on integration” but insisted: “We cannot become involved in things which will ― I am firmly convinced ― lead to an even bigger disaster than we have today.”
“Therefore, we are standing at a crossroads,” she said.
“It would be disastrous if certain countries that have begun to move in the right direction broke off and were left half-way,” Merkel said.
She warned, however, that the effects of such reforms “would not be felt overnight” and “would take some time” to bear fruit.
Merkel said reforms undertaken in Germany had led to Europe’s top economy now turning in an impressive rate of growth compared to others, with record low unemployment.
“This encourages us to say in Europe that structural reforms can produce extremely good results,” the chancellor said, adding that Germany had “paid a price” for its success.
While taking on more debt was an effective way out of the global financial crisis that began in 2008, “we cannot a second time simply answer the crisis with more debt,” argued Merkel.
Finance Minister Wolfgang Schaeuble, speaking at the same CDU gathering, said it would be a “serious mistake” to introduce eurobonds without laying the political groundwork first.
Eurobonds, pushed for by countries like France and Italy and even the United States, would mutualize public debt across the eurozone allowing financially weaker nations to lean on stronger ones for cheaper borrowing.
Schaeuble said eurobonds would only dissuade countries in difficulty from making necessary structural reforms, though he stressed his stance was not “hard-heartedness.”
A German government source said that Berlin would not bow to pressure to boost growth with more borrowing, which could come through eurobonds, and would “maintain that line” at this month’s G20 summit.
“We do not need growth bought on credit, and the Americans understand that,” the senior official, speaking on condition of anonymity, said. “We will maintain that line.”
Germany has come under intense pressure, notably from U.S. President Barack Obama, to do more to put an end to the eurozone crisis that is seen as a threat to the fragile U.S. recovery and the global economy as a whole.
