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Merkel: No Dice on Reopening EU Fiscal Pact

Germany’s Angela Merkel dismissed newly elected French President Francois Hollande’s call to renegotiate the European fiscal pact to include growth measures rather than merely budget constraints.

Ms. Merkel and her government, fearful of popular resistance in Germany, have made clear in recent weeks that they won’t soften their austerity demands embodied in a fiscal pact, a point the German leader reiterated on Monday.

“We in Germany, and me personally, are of the opinion that the fiscal pact is nonnegotiable,” Ms. Merkel told reporters at her party’s headquarters in Berlin. “I consider the fiscal pact to be right and I think there is a basic process in Europe that we agree that after elections, whether in big countries or little countries, we cannot just put everything up for discussion that was negotiated previously.”

Merkel did promise to “work together” with Hollande, but this initial statement shows precisely the opposite. Expect a meeting in the next two weeks.

Merkel also said that if they allowed Hollande to reopen the fiscal pact, they feared other countries would attempt a renegotiation of their deals, in particular the Greek rescue plan. But Merkel had better prepare herself for this. There’s no telling what kind of government will come out of Greece, but it will probably not have the same compliant stance toward the EU-IMF-ECB troika that it had when it agreed to the bailout. Though Merkel wants to deny reality, this will weaken the coalition and force potential change to the rescue package.

Even the mainstream parties in Greece have publicly called for a renegotiation. And there are more renegotiations on the horizon. Local elections in Italy scored victories for left-wing and protest parties, with anti-austerity candidates winning big up and down the map. Comedian Beppe Grillo has a protest party that reached the run-off in Parma, in Northern Italy. National elections next year in Italy could bring a similar outcome.

Over the next year, we could see a coalition form for Hollande of European countries opposed to austerity, desiring more than lip service on economic growth, like a real program to provide it. Brad Plumer has some of the options being bandied about. Either Merkel and the European Central Bank relent on one of the first five – higher inflation, fiscal stimulus from the richer countries, an expanded bailout fund, Eurobonds, or a funding of a European Investment Bank to allow for job creation projects – or we’re going to get to the sixth, where countries begin to drop out of the euro.

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David Dayen

David Dayen