Merkel Proposes New EU Aid Fund

German Chancellor Angela Merkel proposed a new European aid fund to bolster competitiveness as she highlighted disagreements over budget rules, joint borrowing and bank supervision in a pre-summit address.

Speaking to lawmakers in Berlin before heading to Brussels for a two-day gathering of European Union leaders, Merkel laid out her vision for more economic coordination, while expressing “surprise” at negative reaction to a proposal for a watchdog with veto power over national budgets. Her vision includes a fund “limited in time and project-based” and possibly stocked by the proposed financial transaction tax, she said.

“To give all member states the opportunity then to improve their competitiveness and to actually be able to implement these commitments, I propose that we introduce a new element of solidarity,” Merkel said in her speech at the Reichstag parliament building. “Yes, we need solidarity, but we need a form of solidarity that leads to what we need: more competitiveness.”

Exactly three years after Greece touched off the financial crisis by revealing a bigger-than-expected budget deficit, leaders will gather to discuss joint banking supervision and a report by EU President Herman van Rompuy that lays out options for closer economic and fiscal union. Included in his blueprint is a proposal for pooling euro-area debt that is supported by France, Spain and Italy and rejected by Merkel.

Financial aid without conditions attached has in some cases frustrated the drive to streamline economies, “and therefore joint liability is the wrong answer,” she said. What is needed is “exactly this kind of dedicated solidarity.”

Heading into the summit, Spanish and Italian markets have rallied on expectations Greece won't get kicked out the euro, Spain will get the money it needs and the European Central Bank will use its balance sheet to limit potential turmoil. Spanish 10-year bond yields fell to their lowest in six months, declining 7 basis points to 5.39 percent at 11:49 a.m. in Brussels.

Merkel's fund for troubled euro-region members could be financed by proceeds from a transaction tax that she said was backed by 11 member states. It “would maybe even lead to more euro states introducing” the levy, she said.

European leaders, the EU Commission and parliament would monitor outlays from the fund. Countries struggling to balance investment with budget discipline could use it to finance projects, she said.

Veto Power

Merkel said strengthened oversight over national budgets “presupposes” boosting the power of the EU's monetary affairs commissioner. German Finance Minister Wolfgang Schaeuble raised the idea this week, suggesting the EU official be allowed to reject national budgets as a way to enforce spending discipline.

Merkel's message of locking in fiscal rigor risks conflict with partners such as France and prompted criticism in her governing coalition. Markus Soeder, the state finance minister of Bavaria, is skeptical about the idea of budget oversight from Brussels, according to an interview in the Die Welt newspaper today. Soeder's Christian Social Union party is part of Merkel's government.

Merkel coupled her talk of progress on “tough reforms in many countries” with a warning that “naturally, more work is needed” to lock in fiscal stability that Germany, the biggest contributor to euro-area bailouts, says is the only solution.

Countries such as Spain and Greece are making progress with overhauling their economies, she said, restating her goal of keeping Greece in the euro to avoid splintering the 17-nation currency bloc.

“We've done a lot in these three years,” Merkel said. “We've achieved a lot more than in previous years in Europe and the contours of a stability union are already clearly discernible.”

Bloomberg News

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