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Merkel pushes euro zone for reforms after bank closure deal
December 19, 2013 / 3:05 PM / 4 years ago

Merkel pushes euro zone for reforms after bank closure deal

* Germany wants euro zone countries to accept binding reform contracts

* France, Italy pushing for financial incentives for structural reform

By Paul Taylor

BRUSSELS, Dec 19 (Reuters) - German Chancellor Angela Merkel pressed euro zone leaders at a summit on Thursday to agree on binding contracts to reform their economies after finance ministers clinched an outline deal on a common system for closing failed banks.

Fresh from re-election by parliament at the head of a left-right “grand coalition”, Merkel said Berlin was willing to offer some financial support to countries that commit to overhauling their labour markets, public sector, education, research and welfare policies, under the monitoring of the EU.

“If we got a real qualitative leap forward in terms of binding commitments ... then we could also imagine that new ways are found to provide those countries that require additional help to reach their goals with that help,” she told the Bundestag in a pre-summit speech on Wednesday.

Berlin wants its partners in the 17-nation single currency to emulate changes it made a decade ago to unemployment benefits, labour laws and pension system that helped make its economy more competitive.

However, critics say Merkel’s new coalition agreement has watered down some of those measures by agreeing on a national minimum wage and allowing earlier retirement for some, setting a poor example to laggards like France and Italy.

The contracts would add another layer of EU supervision on top of increased European Commission surveillance of member states’ budgets and economic policies under a raft of new rules adopted since the euro zone debt crisis erupted in 2010.

In a draft statement prepared for the summit, leaders say they aim to reach an overall agreement on reform contracts and “associated solidarity mechanisms” at a summit next June, after European Parliament elections set for May.

It cited loans, grants or guarantees among the possible rewards for countries that accepted legally binding contractual arrangements.

Diplomats said the EU initiative was an attempt to increase pressure on countries such as France and Italy to loosen job protection, ease work-time rules, open up closed professions to competition and make welfare and retirement benefits less generous.

Italian Prime Minister Enrico Letta said on arrival he was in favour of creating incentives to carry out reforms and Italy had nothing to fear from the discussion.

A French official stressed that entering such contracts would be voluntary, and questioned whether the limited funds likely to be available would provide a strong incentive to undertake politically unpopular reforms.

PEER PRESSURE

European Council President Herman Van Rompuy, who chairs EU summits, has suggested a small euro zone “fiscal capacity”, separate from the 28-nation EU’s common budget, could subsidise interest rates on soft loans under such a programme, but Berlin remains wary of any open-ended financial transfers.

A senior German official said the proceeds of a planned Financial Transaction Tax which 11 like-minded EU states aim to levy might be used for this purpose.

“The readiness of Germany to generate additional funds is limited, we have said this repeatedly. Any funds must be attached to specific projects and limited in time,” he added.

Some of Berlin’s northern European allies question whether there is any need for financial incentives, arguing that countries should carry out reforms in their own interest to improve their competitiveness and build market confidence.

“Reforms are first and foremost a matter of national responsibility, but the creation of a common coordination system will give us a full picture, create peer pressure and ensure healthy structures,” Finnish Prime Minister Jyrki Katainen said.

Dutch Finance Minister Jeroen Dijsselbloem, who chairs euro zone finance ministers, said last month that cheap loans would remove any incentive to run a sound budget policy,

“Only differentials in the interest rates charged by the markets depending on the policies implemented can give the right signal. Let’s not repeat the same mistakes,” he said

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