Merkel Puts Rescue Fund to German Vote

By Rainer Buergin and Patrick Donahue - Oct 26, 2011 4:20 PM GMT+0700

German lawmakers are set to back a planned increase in the European rescue fund’s capacity, strengthening Chancellor Angela Merkel’s hand before a Brussels summit that aims to quell the euro-area debt crisis.

With contagion threatening Italy, European leaders are also tightening the screws on Prime Minister Silvio Berlusconi to bring concrete reforms to today’s summit as part of a package of measures needed to stem the risk posed to the global economy.

Merkel will address lawmakers on the crisis at noon in the lower house in Berlin, the Bundestag, before her government puts plans to bulk up the 440 billion-euro ($612 billion) rescue fund to a vote. The coalition ensured cross-party support after persuading the main opposition Social Democrats and Greens to sign up to a motion that includes a cap on German guarantees.

“The chancellor will travel to Brussels today bolstered by a clear and very broad mandate from the German Bundestag,” Peter Altmaier, the deputy parliamentary leader and chief party whip of Merkel’s Christian Democratic Union, said in an interview on Deutschlandfunk radio.

German backing to increase the effectiveness of the European Financial Stability Facility is just one piece in the crisis-fighting jigsaw puzzle being assembled. Agreement is still missing on how to bolster the EFSF, reductions in Greece’s debt load and recapitalizing banks.

Euro, Stocks

The 17-nation euro gained 0.1 percent to $1.3926 as of 11:03 a.m. in Berlin after climbing to as much as $1.3960 yesterday, the highest since Sept. 8. The benchmark Stoxx Europe 600 Index was little changed.

The Bundestag is scheduled to vote at about 2 p.m. as it exercises powers over budgetary matters that it won last month after complaints by coalition lawmakers they were being steamrolled into accepting decisions made in Brussels affecting German finances.

“We’re all in new territory,” Merkel said yesterday.

In Italy today, la Repubblica newspaper reported that Berlusconi agreed with Umberto Bossi, leader of the Northern League party which holds the key to Berlusconi’s parliamentary majority, to hold early elections in exchange for a deal on reforms on pensions, liberalization and bureaucracy. Berlusconi agreed to step down by January and to bring elections forward to March of next year 2012, la Repubblica said.

ECB Bond-Buying

The motion before parliament lays down guidelines for Merkel to take to Brussels, including a cap on German guarantees at the existing level of 211 billion euros and a request that the budget committee or the full chamber be given another vote after leverage models have been worked up. It also “notes” that there is no need for the European Central Bank’s secondary- market bond-buying program to remain in place once the enhanced rescue fund is enacted.

“For us it was a condition that the Bundestag, respecting the central bank’s independence, has a clear position: no more unconditional debt-buying by the ECB,” Carsten Schneider, the Social Democratic Party’s budget spokesman in parliament, told reporters after a budget committee meeting late yesterday.

German bonds rose today, with two-year yields falling two basis points, or 0.02 percentage point, at 0.55 percent, after being as low as 0.52 percent, the least since Oct. 6. German bonds have returned 6.95 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, as investors sought a debt-crisis refuge.

Merkel’s bloc has 330 seats in the 620-member Bundestag, allowing her to pass legislation with a simple majority of 311 votes with as many as 19 coalition dissenters. With the help of SPD and Green support, she won a Sept. 29 ballot on enhancements to the EFSF by 523 votes in favor to 85 against.

“We need a simple coalition majority,” Klaus-Peter Flosbach, the finance-policy spokesman of Merkel’s Christian Democratic bloc in parliament, said in an e-mailed statement. “I have no doubt that we’ll achieve that.”

To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Patrick Donahue in Berlin at pdonahue1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net