Europe needs a ‘quantum leap’ in economic integration, warns Merkel

German chancellor Angela Merkel has warned that Europe still needs a "quantum leap" in further economic integration if it wants to put the euro crisis behind it for good.

In an hour-long speech to the Bundestag yesterday, she defended her third term government’s much-criticised pension reform, annual estimated cost €11 billion, and made some critical swipes at the US in the ongoing NSA spy affair. Her political compass, Dr Merkel insisted, remained Germany’s postwar social market economy which, as she put it, “puts people at the heart of politics”.

On Europe she covered familiar ground: that it was in Germany’s interest to have a strong Europe but that Berlin would not shy away from bringing its “values and interests” into the debate.

“We have a currency union with continued weak economic co-ordination. Without decisive progress, without a quantum leap, we will not overcome the European debt crisis,” she said, flagging treaty change and “stronger European institutions” as essential parts of the transformation process.

Grand coalition
Of greater interest to her domestic audience yesterday, however, was her grand coalition's delivery yesterday on its biggest election promise – pensions.

Dr Merkel’s CDU won last September’s election promising to end a two-tier system that gave stay-at-home mothers in the last 20 years greater pension entitlements than older women.

The Social Democrats (SPD), meanwhile, vowed to allow workers retire without penalties at 63 after 45 working years. The new cabinet agreed yesterday to implement both, as well as new measures for a minimum wage of €8.50 next year and a crackdown on contract workers.

Ex-chancellor Gerhard Schröder said this gave “the completely wrong signal to German neighbours , given the reforms we are – correctly – demanding from our European partners”.

“These decisions don’t just cost a few billion euro, the spending recurs every year and will raise the question in a few years,” he said. “There are too few workers in Germany paying for an increasingly large group of pensioners.”

But Andrea Nahles, Germany’s new labour minister, dismissed Mr Schröder’s concerns. “We want to make clear that we recognise the contribution made by people who raised children or worked hard for many years,” she said. “This is not a gift, this was hard-earned.”

Charities, unions and employers were united in their criticism of the pension reform. They call it expensive clientialism by the CDU and SPD towards Germany’s growing army of pensioner voters.

Charities warn that the retirement age of 63 will be a boon to skilled workers, who may choose two-years of unemployment leave at 61, but does little to address growing old-age poverty among unskilled workers.

The opposition Left Party, meanwhile, criticises the pension reforms for retaining lower entitlements for eastern German workers and mothers.

Dr Merkel saved her most direct language for the NSA spying affair, which touched on surveillance of her own mobile phone conversations. Berlin’s relationship with Washington remained close, she said, but the revelations raised uncomfortable questions about how allies co-operate.

“Trust is the basis of co-operation between partner states [but] an approach where . . . everything is done that is technically possible damages trust,” she said. “At the end you have not more but less security.”

After six months of controversy, and lengthy talks with Washington, Dr Merkel admitted that, apart from dialogue “there are no other levers, in my view, to force America to think anew”.

Germany's "herculean task", she said, would be ensuring its shift away from nuclear to renewable energy would not compromise consumer or industry access to reliable and affordable energy – a cornerstone of German prosperity.


EUROPEAN REFORM – THIRD-TERM PLANS
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Angela Merkel remained sitting when she addressed the Bundestag yesterday after injuring her pelvis in a skiing accident. But the German leader made clear that, when it comes to European reform, she has no plans to lean back.

The euro crisis is out of sight but not out of the German leader’s mind. Emergency euro reforms to date were just a warm-up act, confidantes say.

Her third term is when Dr Merkel plans to really spring into action on EU reform. Even after adopting new fiscal rules and a shared banking union, she believes that too much euro area economic co-ordination – and thus the currency’s future health – hinges on sovereign decisions of member states. A greater transfer of competences to European institutions is required – requiring treaty change.

Dr Merkel calls this a “quantum leap” for Europe and the best blueprint of what she has in mind is last May’s Franco-German agreement on greater euro economic co-ordination.

The two capitals call for a permanent euro area leader, more frequent euro meetings and expanded euro area democratic controls for the new European parliament.

The Franco-German paper also calls for a “convergence of tax systems”, though it limits its scope to a financial transaction tax. A final ask, one close to Dr Merkel’s heart, is for “contractual arrangements” or a timetable of reform goals between capitals and European Commission which, if met, open the door to additional financial assistance.

In the Bundestag yesterday, Dr Merkel spoke a lot about her political compass. Increasingly, however, it is an instrument that responds differently to European and domestic concerns.

Reform demands in Europe don’t exclude spending an extra €11 billion annually on pensions at home to meet the election promises of her own Christian Demoratic Union and their grand coalition partner, the Social Democratic Party.

Ex-chancellor Gerhard Schröder has already called foul, warning Dr Merkel not to undermine his decade-old reforms and undermine Berlin’s political clout to demand reforms from its partners. His biggest concern, that a greying German population cannot afford additional pension entitlements, is shared by unions, employers and charities.

Claims the pension reform, and a proposed minimum wage of €8.50, would boost domestic demand were overtaken yesterday by data showing that German consumers are spending more now than in the last six years.

The German leader’s third term is already gearing up to be an interesting duel: between Angela Merkel’s domestic and European profiles.