Merkel Warns of ‘Deceptive Calm’ as Euro Crisis Risk Remains

Jan 29, 2014 11:16 am ET

(Updates with markets starting in sixth paragraph.)

Jan. 29 (Bloomberg) -- German Chancellor Angela Merkel called for a fresh push to create “real economic union” through changes to European treaties, saying that the euro-area debt crisis isn’t yet defeated.

Addressing lawmakers in Berlin today in her first policy speech of the year, Merkel said that Europe risks falling behind unless the 18-nation euro region expands binding commitments and improves its current “unsatisfactory” coordination on economic policy.

“Without decisive progress on this front, without a quantum leap, we won’t overcome the European sovereign-debt crisis,” Merkel said. “We might learn to live with it somehow, but we won’t keep our place at the top of global development.”

Merkel, who won re-election in September, cited her drive to balance the budget in 2015 and Germany’s so-called social- market economy as models for Europe as she set the tone for her third-term coalition with the Social Democratic Party as junior partner. She sat rather than stood at the lectern because of a ski injury sustained in December.

“It has to be Europe’s aim to emerge from the crisis stronger than it went in,” Merkel said. “Because that is so, we can’t trust the deceptive calm we’re seeing right now” in the euro area. The currency union must be deepened “and I’m convinced that this requires further development of the EU’s treaties,” she said.

Bonds vs Currencies

Government bonds in Europe’s most-indebted countries rallied in the first three weeks of 2014, in a sign the crisis that emerged in Greece in late 2009 and went on to dominate Merkel’s second term has abated. Ireland’s 10-year bond yield fell to the lowest since 2005 after it exited its bailout program. The yield on Portugal’s 10-year debt dipped below 5 percent Jan. 21, the lowest since August 2010, the day after Spain’s 10-year yield fell to the lowest since September 2006.

That was before a rout in developing-nation currencies helped fuel a $1.87 trillion selloff in global stocks in the week to Jan. 27. U.S. and European stocks plunged today after rate increases in Turkey, South Africa and India failed to settle market nerves.

“Solid” finances, investment in infrastructure, securing the shift to renewables, strengthening social cohesion and Germany’s responsibility to Europe and the world will be the main themes of her new term, Merkel told lawmakers.

Global ‘Incomprehension’

Germany has “no time to lose” in reforming its EEG clean- energy law to contain energy price increases, even as “the world looks on at Germany’s energy overhaul with a mixture of incomprehension and curiosity,” she said. She cited the European Union’s target of a 40 percent reduction in greenhouse gases by 2030 as underlining the bloc’s role as a “pioneer” on climate protection, saying she’ll push for a binding global climate deal in 2015, when Germany holds the presidency of the Group of Eight leading industrial nations.

While criticizing the surveillance activities of the National Security Agency, saying that spying between allies “sows mistrust,” she reiterated her backing for a free trade agreement between the EU and the U.S. Ties between Germany and the U.S. are still “overwhelmingly important,” she said.

--With assistance from Stefan Nicola in Berlin and David Goodman and Eshe Nelson in London. Editors: Alan Crawford, James Hertling