Angela Merkel to back eurozone bailout fund in sign of greater integration

German Chancellor Angela Merkel
German Chancellor Angela Merkel is set to back the plans for a eurozone bailout fund Credit: PHIL NOBLE/REUTERS

German Chancellor Angela Merkel is set to lend her backing to a eurozone bailout fund, modelled on the world’s lender of last resort, the International Monetary Fund.

The German leader is understood to be braced to support the plan ahead of meeting with French President Emmanuel Macron in Berlin on Thursday, despite opposition from some German conservatives.

The idea of a European Monetary Fund, with greater powers and scope than the existing European Stability Mechanism, has long been opposed by some German politicians who are averse to greater economic integration within the 19 member currency bloc.

According to Mr Macron’s vision, the EMF would act as a “rainy day fund”, set up in order to safeguard against future recessions and financial crises such as that seen in 2009. The French leader has also suggested the creation of a shared eurozone budget worth billions of pounds.

These proposals have been severely criticised by other EU finance chiefs, including those of the Netherlands and Ireland. In a joint statement they condemned their “far-reaching” scope and hinted they would lead to greater Franco-German dominance within the bloc. Mark Rutte, the Dutch Prime Minister, said the EU must avoid “speeding towards federalism”.

French President Emmanuel Macron
French President Emmanuel Macron favours a more federalised EU Credit: VINCENT KESSLER/REUTERS

However, Ms Merkel’s Left-leaning coalition partners, the Social Democrats (SPD), are sympathetic to Mr Macron’s more federalised vision for the eurozone.

Ms Merkel’s position will disappoint many German conservatives who are fearful that if the fund were to fall under the jurisdiction of the European Commission, as the bloc’s largest economy it could be forced to pay for irresponsible fiscal practices in other states.

These concerns are in partly due to the vast, multi-billion bailout of the Greek economy following the country’s sovereign debt crisis. EU members are still divided on the issue of whether or not to ease the Greek debt burden ahead August, when the third tranche of bailout funding expires. Meetings are expected to be held this week in Washington with the IMF and eurozone finance ministers on debt relief for the country.

The IMF has suggested it will not be prepared to support any further financial assistance for the country unless its largely eurozone debtors agree to some form of debt relief.

National oversight is understood to have been made a red line on any EMF agreement for Ms Merkel. This is a bid to strike a pragmatic balance between domestic fears and Mr Macron's vision. It would ensure that Germany can still veto any aid package, something not possible if the European Commission were to administer the fund.

A source told Reuters that the leader would also push for the EMF to apply the same approach to bailout funding as the IMF, which places tough conditions on aid. These austerity measures attached to funding have proven deeply unpopular in Greece.

Marchel Alexandrovich of investment firm Jefferies told The Daily Telegraph that these steps towards greater integration inevitably mean “some country’s taxpayers have to underwrite others”.

“Will that potentially mean that some countries turn around and say that means our voters have questions about eurozone membership? It could happen,” Mr Alexandrovich added.

Claus Vistesen of Pantheon Macroeconomics said that the move “shows something about a shift of baton in the eurozone".

"Macron is taking over, I think Merkel is on her way out.”

Demanding a national veto on drawing on the EMF was “a little bit naughty”, because “it’s not how the EU works”, Mr Vistesen added.

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