UPDATE 2-Germany rejects "E-bond" and euro safety net top-up

Mon Dec 6, 2010 9:15am EST

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* Germany sees no need to boost euro zone safety net

* Also rejects "E-Bond" idea proposed by Juncker, Tremonti

* Says Eurogroup will send "joint signal for more stability"

(Adds quotes, background)

By Andreas Rinke and Paul Carrel

BERLIN, Dec 6 (Reuters) - Germany on Monday rejected the idea of increasing the size of the European Union's safety net and ruled out a proposal to issue a joint euro zone bond, but said it stood squarely behind the single European currency.

Chancellor Angela Merkel cited legal obstacles to the issuance of a joint sovereign bond, or "E-bond" -- an idea that was refloated jointly on Monday by the chairman of the Eurogroup of euro zone finance ministers and Italy's finance minister.

Instead, Merkel called on European governments to implement tougher budget rules to prevent countries living beyond their means, guarding against the fiscal indiscipline that Germany sees as being the root cause of the euro zone debt crisis.

"The treaty does not in our firm view allow any euro bonds, so no uniform interest rate," Merkel told a joint news conference with visiting Polish Prime Minister Donald Tusk.

Countries would have a greater incentive to comply with the EU's fiscal rules, enshrined in the Stability and Growth Pact, if they each had to pay interest on their own debt, she said.

"It is important that innovations to the Stability and Growth Pact are implemented as these guarantee that in the future we will not have a situation like we had in the past," Merkel added.

Europe needed the euro, Merkel said, and Germany would do everything to ensure the single currency was strong and safe -- comments echoed by government spokesman Christoph Steegmans.

"Germany feels committed to the euro, like all member states," Steegmans said. "In a nutshell, if the euro fails, then Europe fails -- that is the position of the whole government."

"The government stands squarely behind the euro and its stability, we have never let there be any doubt about that," he said, adding: "I want to stress that Germany has a great interest in the stability of the euro growing."

EUROGROUP "SIGNAL"

Euro zone finance ministers, who meet in Brussels later on Monday, face pressure to increase the size of a 750 billion euro ($994.5 billion) safety net for debt-stricken members in order to halt contagion in the single currency bloc. [ID:nLDE6B40EJ]

Steegmans rejected this idea, telling reporters: "We see no reason at all at the moment for an increase in the size of the euro rescue shield -- no reason at all."

But he suggested the meeting may produce tangible results.

"The meeting of the Eurogroup today ... will give a joint signal for more stability and confidence," he said.

Wide differences remain in the 16-nation single currency area over how to overcome a debt crisis that has already led to EU-IMF bailouts for Greece and Ireland, and now threatens to spread to Portugal, Spain and possibly Italy.

Jean-Claude Juncker, chairman of euro zone finance ministers, and Italian Finance Minister Giulio Tremonti made a joint case in Monday's Financial Times for a joint sovereign bond, or "E-bond", to send a signal to markets and citizens of "the irreversibility of the euro". [ID:nLDE6B40HG]

Steegmans, echoing Merkel, ruled out the "E-bond" idea.

"The government rejects euro-bonds not just on economic grounds but also because that would require considerable treaty changes," he said.

(Additional reporting by Annika Breidthardt and Erik Kirschbaum; Editing by Ron Askew)

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