Germany May Compromise on Joint Debt

BERLIN—Germany may willing to move sooner than expected accept shared liability of euro-zone debt and would support short-term measures to deal the acute financing problems facing some of the region's governments, German Finance Minister Wolfgang Schäuble said an interview with The Wall Street Journal ahead Thursday's European summit.

Mr. Schäuble said Germany could agree some form of debt mutualization as as Berlin is satisfied that the path toward establishing centralized European controls irreversible.

"We have to be sure a common fiscal policy would be irreversible and coordinated. There will be jointly guaranteed bonds without a common fiscal policy."

Such a fundamental change— effect, a grand European bargain between Germany and euro members—would require countries to give a large degree of sovereignty their budgets. Many European policy makers asking how far Berlin is willing to go to put its financial strength the disposal of the euro .

"We are willing to go far as we need to in order to get a sustainable agreement in Europe," said Mr. Schäuble, speaking in Spartan Berlin office.

His comments indicate Germany is more flexible many observers in Europe think after Chancellor Angela Merkel told German lawmakers early this week wouldn't be full mutualization of European debt in lifetime. German lawmakers present said that Ms. Merkel's remark was made jest and that media have exaggerated significance. Mr. Schäuble's comments seem to support this view.

Berlin continues to insist European leaders concrete steps toward a fiscal union, Mr. Schäuble signaled Germany is open to a level of mutual financial support euro members—under the right conditions—that so far been taboo in the currency bloc's biggest country.

"We cannot separate liability (for public debt) the competence to decide fiscal policy. This would be to ignore the basic lessons of the crisis. As soon we have a joint EU fiscal policy, we can consider joint liability—the sequencing is key," Mr. Schäuble said.

In , Mr. Schäuble acknowledged that Europe might have to short-term action to stop the exodus of private-sector capital the region's bond markets and said that were a number of instruments that could used, including direct purchases of government debt euro-zone bailout funds: the European Financial Stability Facility and the European Stability Mechanism.

Mr. Schäuble's comments the timing of a move to some form of common debt issuance are significant senior German officials have previously suggested that shared liability debts could only happen in the very long , after the euro zone has fixed all of its structural flaws.

Mr. Schäuble suggested the necessary legal changes to allow common debt liability could achieved faster than many observers thought possible a few months ago.

Analysts say a major challenge establishing common debt issuance would be to shorten or bypass the cumbersome process of amending the European Union treaty the parliaments of all 27 EU member countries, without running constitutional hurdles in Germany itself.

Germany's hints at flexibility suggest Berlin willing to go than anticipated to reach a compromise with France and other euro-zone countries a new governance structure for the euro zone, no final agreement is expected at Thursday's summit in Brussels.

Countries are implementing economic and fiscal reforms but still face pressure bond yields could formally request that the bailout funds intervene, Mr. Schäuble said. He added that he opposes recent proposals automatic intervention by the funds without a formal government request.

Investors have retreated the debt of Spain and Italy in recent months, driving the countries' borrowing costs and stoking fears they could soon the ability to raise fresh funds in capital markets. Europe's bailout funds have the power intervene directly in euro-zone bond markets by purchasing debt directly at government auctions alongside private investors or in the open market. Such moves could help renew investor confidence countries' debt sustainability and bring yields down, Mr. Schäuble suggested.

"We can do whatever is possible within framework of the EU treaties," said Mr. Schäuble, speaking in English in an hour-long interview late Wednesday.

He said Germany doesn't believe the efficacy of throwing more money a firewall to fight financial contagion. Europe and the International Monetary Fund now have some $2 trillion resources as a global firewall, said Mr. Schäuble, as he called ending the discussion building an even higher firewall.

"It does not sense to open this discussion over and again," he said. "In the , the firewall can only be the vehicle to give the countries focus the time to do the necessary reforms, and that is what we must aim ."


Adapted and abridged from: The Wall Street Journal, June 28, 2012.