Chancellor Angela Merkel left the door open to a compromise ondebt sharing in the euro area as Italian Prime Minister Mario Montisaid he can help bring Germany round to acting in Europe's “commongood.”

Merkel's veto on allowing Germany to underwrite joint debtissuance in the 17-nation euro region is under fire from herinternational partners as well as the domestic opposition. Whileshe refused to back joint euro-area bonds at a Brussels summit onMay 23, Germany's opposition parties wrung a concession from thechancellor on her return to Berlin yesterday to reconsider aseparate proposal on common liability for sovereign debt.

The blueprint, published in November by Merkel's council ofeconomic advisers, involves a so-called European redemption fundthat would help governments scale back outstanding debt to below 60percent of economic output in return for constitutional commitmentson economic reform. The government and opposition agreed to studythe fund and discuss it further on June 13.

“The concept amounts to a third way to tackle the euro area'sdebt mountain,” Peter Bofinger, a professor of economics at theUniversity of Wuerzburg and one of the proposed fund's architects,said today by phone. “Euro bonds have a dreadful press and areevidently unacceptable to Germany. What's overlooked by the fund'scritics is that it is temporary and has built-in inducements onstates to run sound budgets. I don't know right now whether theconcept will be adopted, but it deserves earnestconsideration.”

Stocks fluctuated as the euro rose from a 22-month low againstthe dollar. The Stoxx 600 Index dropped 0.1 percent to 241.75 as of1:42 p.m. in Berlin, after earlier rising as much as 0.8 percent.The euro was up 0.3 percent at $1.2572.

Merkel called the Berlin meeting in a bid to secure passage ofEurope's budget enforcement treaty and associated legislationsetting up the permanent rescue fund before parliament's summerrecess on July 6. She needs to assuage opposition anger over herausterity-first stance during the debt crisis to win the two-thirds majority needed to pass the bills in both houses ofparliament.

The talks took place after Merkel clashed with fellow EuropeanUnion leaders at the Brussels summit over her refusal to considereuro bonds. Merkel was in the minority in rejecting them, accordingto Monti.

'Anything Can Happen'

“Europe can have euro bonds soon,” Monti said in an interview onItalian television station La7 yesterday. Germany has an economicinterest in ensuring no country leaves the euro, while Greece willprobably remain in the currency region even as “anything canhappen,” he said.

“A united Europe is in Germany's interest,” Monti said. “We'llhave euro bonds if the euro area, and therefore Germany, will wantthem.”

Monti's account of the meeting contrasted with that ofLuxembourg Prime Minister Jean-Claude Juncker, who told reportersin Brussels that joint debt sales “didn't find much support,”particularly in the German-speaking area, while the French-speakingarea was more enthusiastic.

Back in Berlin 15 hours later, Merkel's coalition and theopposition Social Democrats and Greens agreed that euro bonds “arenot up for discussion,” Volker Kauder, the floor leader of Merkel'sChristian Democratic Union, told reporters. At the same time, thetwo sides agreed to “exchange studies” on the redemption fundbefore next month's meeting.

The government has “legal reservations” about whether jointliability for national debts “is in line with European treaties”and is examining the matter, Merkel's chief spokesman, SteffenSeibert, said today.

The fund, backed by euro member states' gold reserves, would beworth 2.3 trillion euros ($2.9 trillion). Under the system,participating countries would be able to transfer debt exceedingthe 60 percent threshold into the fund for which participatingmember countries are “jointly and severally liable,” according tothe council's paper. Limited to 25 years, it would be accompaniedby a pledge by states to anchor debt limits in their constitutionsand commit to economic reforms.

Michael Meister, the CDU's deputy floor leader, said in aninterview that joint liability “runs counter to European law” andGermany's constitution.

“European treaties as well as the constitution would have to bechanged, and I don't see a chance for either,” he said.

Public opinion is with the government. Seventy-nine percent ofGermans back Merkel's rejection of euro bonds, with littledifference between government and opposition supporters, a Feb.22-24 FG Wahlen poll for ZDF television showed today.

No Big Bang

Merkel, who poured cold water on the redemption fund when it wasunveiled last year, again doused joint debt liability in a speechyesterday, saying that the causes of the debt crisis “can't beredressed with one big bang.”

“This means very hard work for Europe,” Merkel told anelectrical industry conference in Berlin. “It makes no sense topaper over everything with euro bonds or other instruments thatostensibly show solidarity, only to find Europe in even moredifficult straits than we are in today.”

Sigmar Gabriel, chairman of the main opposition SocialDemocrats, told reporters after yesterday's meeting with the Merkelthat he had the impression “the government's blockade on growth hasbeen broken.” Even so, thus far the government is “being extremelyreticent” with regard to the redemption fund proposal, “even ifthey're not rejecting it.”

Whatever the fund's merits, Merkel needs the fiscal pact to passin parliament, Jan Techau, director of the European Center of theCarnegie Endowment for International Peace in Brussels, said byphone. If she wavers, “it would be political suicide and themarkets would go crazy.”

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