Merkel urges gradual political union in Europe

By GEIR MOULSON JUERGEN BAETZ Updated at 2012-06-07 19:44:11 +0000


BERLIN (AP) — German Chancellor Angela Merkel has called for Europe to take a gradual path towards political union, frustrating the appeals of many of her colleagues for quick, bold moves to fight the continent's raging financial crisis.

After a meeting with British Prime Minister David Cameron, who called for "urgent action," Merkel noted Thursday that the debt crisis has built over the 10 years of the currency's existence and cannot be fixed overnight.

"Now it will also take a few years to get things right again," she said.

There are big expectations in financial markets that European leaders will agree at a summit on June 28 some new measures to fight the crisis, but Merkel waved the notion away, saying no single meeting would solve the continent's problems.

Experts say the eurozone's structure is not sustainable because while 17 countries share the same currency and interest rates, national governments retain control of budget policies. That means economies are radically different. In times of economic stability that was not a problem, but as financial turmoil grew, the weaker economies lagged behind the stronger ones.

That's why European leaders, including Merkel, agree they need to work toward a fiscal union, in which governments pool their spending decisions and their debt responsibility. The question is how quickly that is achieved.

Merkel says it should be gradual. "We must, step by step as things go forward, give up powers to Europe as well," she said earlier Thursday on ARD public television.

Such a cautious approach to the crisis is frustrating many European officials and fellow leaders as the 17-country eurozone flirts with disaster — Greek politicians threaten to pull the country out of the currency bloc and Spain is at risk of bankruptcy.

European officials in Brussels and several eurozone countries are pushing Germany to accept new measures — such as jointly guaranteed debt, called eurobonds, or a central banking authority — that would help defuse concerns about excessive debt in weak countries.

But Berlin is against such steps in the near term, worrying they would lower incentives for weak states to fix their finances and would cost German taxpayers more money.

Merkel wants all eurozone governments to have sound finances before agreeing to link the bloc's finances more closely. Her critics argue that because of the current crisis, greater fiscal union cannot wait.

With the eurozone crisis threatening the global economy, Cameron agreed that the eurozone must become more integrated and consider more joint liability, such as a banking union.

The idea of a centralized European authority overseeing banks and guaranteeing their deposits — first proposed by the European Commission last week and quickly endorsed by the European Central Bank — has gained attention since it became clear that Spain, which is already under market pressure due to its debt burden and declining economy, will have to shore up billions of euros to prop up its banks.

"I'm very clear that urgent action is needed to deal with the market uncertainty," Cameron said. "That is about building firewalls and recapitalizing the banks."

While he stressed further integration was crucial for the currency bloc's stability, he left no doubt that Britain — which doesn't use the euro — expects the eurozone to tackle its own problems. He said he could not ask British taxpayers to guarantee "Greek or Spanish bank deposits."

In Washington, Federal Reserve chief Ben Bernanke told lawmakers that concerns about sovereign debt and the health of banks in a number of eurozone countries pose a significant risk to U.S. financial markets.

"The crisis in Europe has affected the U.S. economy by acting as a drag on our exports, weighing on business and consumer confidence, and pressuring U.S. financial markets and institutions," he said.

"European policymakers have taken a number of actions to address the crisis, but more will likely be needed to stabilize euro-area banks, calm market fears about sovereign finances, achieve a workable fiscal framework for the euro area, and lay the foundations for long-term economic growth," he said, according to a transcript of his speech to the congressional Joint Economic Committee.

Merkel has also faced criticism for focusing Europe's response to the debt crisis on austerity measures. Painful budget cuts during a time of recession have proved counterproductive in some countries, leading some European leaders to call for new measures to boost growth. Merkel insisted that "budget consolidation and growth are two sides of one and the same coin."

Rather than increasing government spending to boost growth, she has mainly pushed for reforms that make economies more competitive. Such measures typically include making the labor market more flexible, cutting red tape and lowering costs for businesses.

Merkel has championed a budget-discipline agreement, the fiscal compact, in hopes of securing Europe's future financial solidity. Some countries already have ratified it, and Irish voters backed it in a referendum last week.

In Germany, her coalition government is negotiating with the center-left opposition to secure the necessary two-thirds majority in Parliament. The opposition is insisting on measures to foster growth in southern Europe's ailing nations and movement toward introducing a tax on financial transactions.

On Thursday, negotiators made progress toward an agreement on a transaction tax, opposition Green party lawmaker Priska Hinz said. That would call for Germany to pursue a tax in Europe on a wide range of transactions, even if not all 17 eurozone countries participate.

The two sides aim to reach an agreement next week, but they remain apart on other issues, Hinz said.

"I am glad that those talks are productive," Merkel said. "Next Wednesday we will see how far we have come."

Merkel's junior coalition partners, the Free Democrats, have in the past been very wary of introducing a transaction tax, particularly if it doesn't cover the whole of Europe.

The United Kingdom, whose capital London is Europe's biggest financial hub, remains staunchly opposed to a Europe-wide financial transaction tax.