Merkel to back lower Irish rates for fiscal restraint

GERMANY IS prepared to back lower-interest loans to Ireland and other peripheral euro zone countries if they agree to anchor a new “fiscal framework” in their constitutions.

Picking up the pace of euro zone reform, Chancellor Angela Merkel met European Commission president José Manuel Barroso yesterday evening to ease tensions after a public falling out on reform. Ahead of their meeting, a senior German official said Berlin was prepared to look at the “certain margin” on loans to Greece or those to Ireland through the euro zone rescue fund, EFSF.

“We can look at this if countries at the same time would be willing to accept a kind of national fiscal framework to be enshrined in their constitution, yes,” said Jörg Asmussen, senior official in the finance ministry.

He declined to specify what “framework” he had in mind, but officials pointed to Berlin’s 2009 “debt brake” as a guideline. This constitutional provision limits new federal borrowing to 0.35 per cent of gross domestic product from 2016.

Berlin officials say they are open to how Ireland and others go about their task, once they achieve the end goal of long-term fiscal responsibility.German officials say further assistance to euro zone partners from Berlin goes without question.

“It has to be clear that interest rates as part of an EU/IMF programmes are set in a way that there are clear incentives for the countries concerned to return to markets,” said Mr Asmussen. But senior officials in Berlin say “solidarity isn’t a one-way street” and agreeing lower interest rates is conditional on agreement on new fiscal guarantees.

European economic and monetary affairs commissioner Olli Rehn was in Berlin yesterday to meet the Free Democrats (FDP), Dr Merkel’s junior coalition partner and increasingly vocal opponent of euro zone rescue measures.

Just as Berlin is increasingly seen as key to any revised euro zone rescue plan, there are growing signs that agreement in the Berlin coalition depends on the FDP. Neither Mr Rehn nor Mr Barroso are very popular with the small party after their call for the lending capacity of the EFSF fund to be increased.

FDP leader Guido Westerwelle dismissed that call, saying it undermined the stability of the fund. With his party struggling for support ahead of a series of crucial state elections, Mr Westerwelle has found in the euro zone bailout discussion a classic vote-winner for his pro-business party. “We cannot fight debt with more debt,” he said after meeting Dr Rehn yesterday.

Acknowledging Berlin’s call for a new “fiscal framework”, Mr Rehn told the FDP he favoured an “effective sanctions regime to make sure economic governance is reinforced”.

FDP politicians deny they will hinder euro zone stabilisation efforts. “We favour support for self-help, yes, but not if the problems recur later,” said Dr Volker Wissing,finance spokesman, after the Rehn meeting.