MARCH 17, 2010, 1:35 P.M. ET.
Merkel Says Euro-Zone Expulsion Should Be an Option
By PATRICK MCGROARTY
BERLIN—Countries that threaten euro-zone stability should face expulsion, German Chancellor Angela Merkel said Wednesday, and while Greece won't face such harsh consequences, European nations shouldn't make a "rash decision" to help Athens out of its debt crisis.
"We need an agreement that as an ultima ratio it's possible to exclude a country from the euro zone if again and again it doesn't fulfill the requirements," Ms. Merkel said in an address to Germany's lower house of parliament.
Ms. Merkel's remarks were a clear reinforcement of German reluctance to prepare a detailed financial rescue package for Greece. Euro-zone finance ministers discussed a contingency plan this week, and it could be approved by government leaders in Brussels next week, though German officials have said they don't expect a final agreement at that meeting.
The European Central Bank released a paper in December that said kicking a profligate member out of the euro zone would be nearly impossible under European Union law, and that a country leaving the currency bloc voluntarily would probably also have to quit the EU altogether.
Ms. Merkel has said that an expulsion mechanism—first mentioned as a power of the European Monetary Fund her finance minister, Wolfgang Schäuble, wants euro-zone members to establish—would require a treaty change for the currency bloc and the approval of all 27 EU members, not just the 16 countries that use the euro. But winning such approval would be extremely difficult, if not impossible.
Kai Carstensen, an economist at the Ifo research institute in Munich, said euro-zone members with the weakest finances would have little incentive to go along. "Why should, given the current situation, Greece, and maybe Portugal, agree to that?" Mr. Carstensen said.
Ms. Merkel's spokesman, Ulrich Wilhelm, said Wednesday that securing approval for the new rule would take "a few years"—a vast understatement, said Simon Tilford, chief economist at the Center for European Reform, a London think tank, considering the history of the Lisbon treaty.
A set of reforms to the EU's cumbersome bureaucracy ratified in October after almost a decade of negotiations, the treaty was repeatedly derailed by the concerns of a single member state. Even the Lisbon treaty was itself a reworking of the more ambitious EU constitution rejected by French and Dutch voters in 2005.
"I don't see such a treaty change ever being agreed," Mr. Tilford said. "Other member states will not accede to this in the absence of any recognition on the part of the Germans that they will need to amend their economic strategy if the stability of the euro zone is not to be compromised."
Ms. Merkel, aiming her remarks Wednesday at German voters who are deeply skeptical about their responsibility to help solve another country's budget problems, said steps to shore up market confidence in Greece must begin in Athens. "We don't want a rash decision on aid that has no effect over the long term and continues to weaken the euro," Ms. Merkel said. "We can't forget that the Greek situation wasn't caused by speculators; it was aggravated by speculators."
Ms. Merkel called the crisis in Greece, where a budget deficit above 12% of gross domestic product has prompted fears about the government's ability to pay its debts and the currency bloc's power to stabilize a struggling member, "the greatest challenge yet to face the euro" and said it exposed a need for broad new regulations.
"Today we don't have the right instruments," Ms. Merkel said. "We need to reach agreements that will help us avoid such a situation." She called for action against "excesses on the financial markets," including an EU ban on so-called naked credit default swaps.
Ms. Merkel also urged U.K. Prime Minister Gordon Brown to support new regulations on hedge funds that his government has opposed for fear it will hurt financial companies operating in London. "His onetime tax on [bankers'] bonuses made half as much sense as it would if Great Britain would agree to the hedge-fund regulations we're discussing now," she said.
Lashing out at criticism of the substantial trade surpluses Germany has with its southern European partners, Ms. Merkel said the country's heavy reliance on exports is a plus, not a minus. "Germany will not forfeit its export strength," Ms. Merkel said. Her affirmation of the exports that drive Europe's largest economy made her the latest German official to hit back against French Finance Minister Christine Lagarde, who said the strategy creates unsustainable imbalances in the euro zone. Ms. Lagarde, speaking on French radio Wednesday, said that Germany should lower taxes to boost domestic consumption.
The German government has drawn up a 2010 budget with a record €80.2 billion ($110.49 billion) in new debt, including stimulus spending to fight the lingering ramifications of a worldwide financial crisis that Ms. Merkel said hasn't yet disappeared.
Germany's economy contracted 5% in 2009, its worst performance since World War II. The government projects it will return to growth at a rate of 1.4% this year. Fostering the nascent recovery and at the same time preparing consolidation measures that will allow Germany to meet European Union rules to keep budget deficits within 3% of GDP will be a "Herculean challenge," Ms. Merkel said.
"We need new ideas to overcome these huge challenges," she said, above all an "intelligent exit strategy" from Germany's stimulus measures.
Ms. Merkel said the her government will meet its obligation to reduce its structural budget by €10 billion annually from 2011, in line with a constitutional provision that debt be limited to 0.35% of GDP by 2016.
Write to Patrick McGroarty at
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