Chancellor Angela Merkel backed the European Central Bank'sinsistence on conditions for helping reduce borrowing costs inindebted countries, saying Germany is “in line” with the ECB'sapproach to defending the euro.

“Obviously time is pressing” on stamping out the debt crisis,though “on many of these issues we feel we're on the right track,”Merkel told reporters in Ottawa yesterday at a joint pressconference with Canadian Prime Minister Stephen Harper. Euro-areapolicy makers “feel committed to do everything we can to maintainthe common currency.”

Asked about ECB chief Mario Draghi's announcement that thecentral bank may return to sovereign bond-buying, Merkel saidrecent ECB decisions “have made it clear that the European CentralBank is counting on political action in the form of conditionalityas the precondition for a positive development of the euro.”

Merkel, facing European pressure to ease bailout terms and allowshared debt as well as calls by global partners to stop contagion,returned to the crisis fight after her summer vacation, using thetrip to Canada to make her first public comments on the turmoil ina month. She hailed Canada's budget and debt discipline as a modelfor the 17-nation euro area.

Draghi said on Aug. 2 that the ECB might buy government bonds tohelp lower borrowing costs in countries such as Spain and Italy,though only in return for strict conditions and if governments actfirst by buying debt through Europe's bailout funds. Spain andItaly have yet to say whether they will request aid.

“It is becoming clear that the ECB purchases have to beconditional on the implementation of austerity and structuralreform measures in that country,” Citigroup Global Markets analystsled by Juergen Michels said in a note to clients.

Merkel is returning to the global stage as the crisis enters anew phase. Germany's supreme court will rule on the legality ofEurope's permanent rescue fund next month, when Greece'sinternational creditors are due to report on progress in meetingbailout targets. Draghi said the ECB will thrash out the details ofits bond-buying proposals by then.

Hollande, Samaras

Merkel steps up her crisis-fighting diplomacy next week, whenshe is due to host French President Francois Hollande Aug. 23,Paris-based Agence France-Presse reported, one day before GreekPrime Minister Antonis Samaras visits Berlin for talks. Italianmedia reported that Prime Minister Mario Monti is due in the Germancapital on Aug. 29, while Spanish Prime Minister Mariano Rajoy hassaid that Merkel will visit Madrid on Sept. 6.

Finnish Foreign Minister Erkki Tuomioja said his country, one offour in the euro region with the top AAA credit rating, ispreparing for the currency union's breakup, the U.K.'s Telegraphnewspaper reported today, citing an interview.

“We have to face openly the possibility of a euro breakup,”Tuomioja was quoted as saying. While that's not advocated by theFinnish government, a breakup “could make the EU function better.”Tuomioja told Finnish media today that he had only been stating theobvious.

Merkel, as leader of Europe's largest economy and the biggestsingle contributor to euro-region bailouts, is facing calls fromItaly and Spain to pool debt to bring down bond yields, from Greeceto back an easing of its austerity timetable and from the ECB forpoliticians to take the lead in fighting the crisis. She also facesdomestic pressure from her coalition partners to refuse any moreaid for Greece.

Italian 10-year bond yields opened little changed at 5.78percent as of 9:07 a.m. while equivalent Spanish debt slid 1 basispoint to 6.49 percent. Spanish yields reached a euro-era high of7.62 percent on July 24, beyond the threshold that prompted Greece,Portugal and Ireland to seek bailouts. German 10-year bonds yielded1.53 percent today. The euro bought $1.2361.

Harper, who offered Merkel a barbecue with elk meat upon herarrival, Canada's CTV news channel reported on its website, said“there are additional things that have to be done” by Europeanpolicy makers. “I have great confidence in the chancellor'sleadership,” he said.

'European Friends'

“We have great confidence in our European friends,” Harper said.“My experience has been the vast number of them are seized with thescale of the challenge and with the range of options that have tobe considered.”

Even so, Greece, on its second rescue program after triggeringthe crisis in late 2009, may run out of road at the end of theyear. Samaras's government probably can't come up with enoughausterity measures even if creditors extend the time line as hiscoalition wants, according to the Citigroup note. That means an endto international funding “looks very likely” after the next auditset for December, it said.

Europeans “need to do much more,” Canadian Finance Minister JimFlaherty told reporters two days ago. “We have been clear forseveral years that not only should the European countries takeoverwhelming concerted action to take control of the situation, butalso that the European countries have more than adequate resourcesto do so.”

Merkel, a physicist by training, visited an ocean researchcenter in Halifax yesterday on her trip back to Berlin. Germanbusiness leaders accompanying the chancellor included the chiefexecutives of BASF SE, the world's largest chemical maker,ThyssenKrupp Marine Systems and K+S Group, which is involved inmining potash in Saskatchewan, CTV reported.

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