Chancellor Angela Merkel rejected quick solutions proposed tofix Europe's financial crisis such as joint debt sharing, sayingGermany can't save the world economy alone and fellow Group of 20countries must help.

Merkel, in a speech to parliament in Berlin today, said the debtcrisis and Germany's role in stemming it will be the “centraltopic” at next week's G-20 summit in Mexico. While Germany will useits strength “in the service of European unity,” the euro and theglobal economy, Merkel said she opposes “seemingly easy” solutionsthat risk backfiring.

“All eyes are on Germany,” she said. “But we also know thatGermany's power is not infinite. So our responsibility as Europe'slargest economy is to deploy our strength credibly, so that we canbe of full use to Europe.”

Merkel signaled a showdown with global peers at the June 18-19meetings over ending the crisis that has made Spain the fourtheuro-area country to need a bailout and driven up Italy's borrowingcosts. Finding a solution is a “Herculean task” that requiresEuropean nations to embrace “political union” step by step, givingup some national powers in the process, she said.

Merkel will travel to the G-20 summit in the Pacific coastalresort of Los Cabos as Greece votes in June 17 elections that maydetermine its fate in the euro region. Spain's announcement that itwill ask for as much as 100 billion euros ($126 billion) in aid forits banks has meanwhile failed to quell global turmoil in financialmarkets that President Barack Obama says is harming the U.S.economy in an election year.

Spanish lenders' net borrowings from the European Central Bankjumped to a record 287.8 billion euros in May, highlighting thefinancial system's need for funding before Spain's bailout.

European policy makers “recognize they're going to have to do abunch more,” U.S. Treasury Secretary Timothy F. Geithner said inWashington yesterday. “The world's going to have a chance thisMonday and Tuesday in Mexico at the G-20 meeting to hear from themwhere they plan to go next.”

Merkel pushed back against her critics, pressing the U.S. andJapan to reduce their debt, urging China and other emergingeconomies to make exchange rates more flexible and saying the worldmust “resist the temptation” to spur growth with deficitspending.

“The reasons for the sickly world economy truly don't lie onlyin the euro zone,” Merkel told lower-house lawmakers. It's“indispensable” that G-20 leaders pledge budget consolidation in ajoint action plan they will pass in Mexico.

Monti Rebuff

As the crisis threatens to engulf Italy, Merkel's speech alsoamounted to a rebuff of fellow European Union leaders includingFrench President Francois Hollande and Italian Prime Minister MarioMonti, both of whom are calling for Germany to underwrite jointeuro-area debt.

Italy sold 4.5 billion euros of debt today, with its 3-yearbenchmark bond to yield 5.3 percent, up from 3.91 percent at thelast auction one month ago and the highest paid since December.

Budget austerity and measures to promote growth in Europe remainthe twin pillars of stemming the crisis right now, Merkel said. Hermessage that Germany can't shoulder the burden alone is aimed at“all those in Los Cabos will be looking to Germany, who areexpecting the 'big bang' and the solution from Germany — such aseuro bonds, stability funds, European deposit-insurance funds,additional billions and much more,” she said.

“All resources, all measures, all packages will end up beingsmoke and mirrors if it becomes clear in the end that they extendbeyond Germany's capacity,” she said.

At the same time, Germany is committed to the project of unitingEurope and the currency union that has grown to 17 members, whichwas born flawed 20 years ago because the European Union wasn't apolitical union, Merkel said.

“So it's our obligation today to do what has been neglected, tobreak the vicious circle of generating ever more debt and breakingthe rules,” she said. Germany is “convinced that Europe is ourdestiny and our future. If the euro fails, Europe fails.”

Bloomberg News

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