July 6, 2012 / 4:38 PM / 7 years ago

German "wise men" reiterate call for redemption fund

BERLIN, July 6 (Reuters) - Germany’s panel of government economic advisors said on Friday the decisions made at last week’s EU summit could stabilize the euro zone in the short term but do not solve the crisis which could still escalate further.

The panel of so-called wise men, whose advice the government does not have to follow, reiterated their call for a debt redemption fund, and joined a chorus of critics in Germany warning against the premature introduction of a banking union.

“The crisis remains unresolved and new escalations threaten if the existing vicious circle of banking crisis, sovereign debt crisis and macroeconomic crisis is not broken,” they said in a statement.

“For this reason the panel of experts has presented the government with a report indicating ways to end the sovereign debt crisis and the measures needed to stabilize the banking sector in a sustainable fashion.”

The wise man said they had elaborated on the concept of a European Redemption Pact, which they already proposed late last year. It would have a fixed time frame, they said, and allow for the possibility of linking aid to conditions.

“This differentiates it from European Central Bank (ECB) monetary policy measures,” they said in the statement. “It can be constructed such that European and constitutional standards are respected.”

The wise men, like many of their compatriots in leading economic roles, have warned that monetary and fiscal policy are becoming worryingly blurred and the ECB risks losing credibility by buying the bonds of heavily-indebted euro zone states.

In their presentation of the pact last year, they said it would involve countries with sovereign debt above 60 percent of GDP pooling their excess debt into a redemption fund with common liability. They would commit to reforms and see their debts repaid over 20-25 years.

Within a few years the redemption fund could have a volume of 2.3 trillion euros worth of bonds, the wise men’s study said.

But Germany’s Chancellor Angela Merkel had said the proposal would face several constitutional problems that would require changes of European treaties. She also said the proposal would be “impossible to implement in reality”.

The wise men panel was also cautious on Friday about the plans for European banking union that Merkel signed up to last week, and that more than 150 economists criticized in a joint open letter in a German daily this week.

“The solution to the acute crisis cannot lead to the overhasty introduction of a banking union,” the wise men said.

Under pressure to stem a two-year long debt crisis, euro zone leaders last week agreed to take a first step towards a European banking union and create a single banking supervisor for the area’s banks based around the ECB.

The deal, which also included a pledge to let the euro zone rescue fund inject aid into stricken banks and intervene on bond markets, has been portrayed in German media as a defeat for Merkel and a victory for her Spanish and Italian counterparts. (Reporting By Sarah Marsh)

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