Germany May Compromise on Joint Debt

By WILLIAM BOSTON and MATTHEW KARNITSCHNIG

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German Finance Minister Wolfgang Schäuble addresses a press conference in Berlin on Wednesday.

BERLIN—Germany may be willing to move sooner than expected to accept shared liability of euro-zone debt and would support short-term measures to deal with the acute financing problems facing some of the region's governments, German Finance Minister Wolfgang Schäuble said in an interview with The Wall Street Journal ahead of Thursday's European summit.

Mr. Schäuble said Germany could agree to some form of debt mutualization as soon as Berlin is satisfied that the path toward establishing centralized European controls is irreversible.

"We have to be sure that a common fiscal policy would be irreversible and well coordinated. There will be no jointly guaranteed bonds without a common fiscal policy."

Such a fundamental change—in effect, a grand European bargain between Germany and other euro members—would require countries to give up a large degree of sovereignty over their budgets. Many European policy makers are asking how far Berlin is willing to go to put its financial strength at the disposal of the euro zone.

"We are willing to go as far as we need to in order to get a sustainable agreement in Europe," said Mr. Schäuble, speaking in his Spartan Berlin office.

His comments indicate Germany is more flexible than many observers in Europe think after Chancellor Angela Merkel told German lawmakers early this week there wouldn't be full mutualization of European debt in her lifetime. German lawmakers present said that Ms. Merkel's remark was made in jest and that media have exaggerated its significance. Mr. Schäuble's comments seem to support this view.

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While Berlin continues to insist European leaders take concrete steps toward a fiscal union, Mr. Schäuble signaled Germany is open to a level of mutual financial support between euro members—under the right conditions—that so far has been taboo in the currency bloc's biggest country.

"We cannot separate liability (for public debt) from the competence to decide on fiscal policy. This would be to ignore the most basic lessons of the crisis. As soon as we have a joint EU fiscal policy, we can consider joint liability—the sequencing is key," Mr. Schäuble said.

In addition, Mr. Schäuble acknowledged that Europe might have to take short-term action to stop the exodus of private-sector capital from the region's bond markets and said that there were a number of instruments that could be used, including direct purchases of government debt by euro-zone bailout funds: the European Financial Stability Facility and the European Stability Mechanism.

Mr. Schäuble's comments on the timing of a move to some form of common debt issuance are significant because senior German officials have previously suggested that shared liability for debts could only happen in the very long term, after the euro zone has fixed all of its structural flaws.

Mr. Schäuble also suggested the necessary legal changes to allow common debt liability could be achieved faster than many observers thought possible just a few months ago.

Analysts say a major challenge for establishing common debt issuance would be to shorten or bypass the cumbersome process of amending the European Union treaty via the parliaments of all 27 EU member countries, without running into constitutional hurdles in Germany itself.

Germany's hints at flexibility suggest Berlin is willing to go further than anticipated to reach a compromise with France and other euro-zone countries on a new governance structure for the euro zone, although no final agreement is expected at Thursday's summit in Brussels.

Countries that are implementing economic and fiscal reforms but still face pressure on bond yields could formally request that the bailout funds intervene, Mr. Schäuble said. He added that he opposes recent proposals for automatic intervention by the funds without a formal government request.

Investors have retreated from the debt of Spain and Italy in recent months, driving up the countries' borrowing costs and stoking fears they could soon lose the ability to raise fresh funds in capital markets. Europe's bailout funds have the power to intervene directly in euro-zone bond markets by purchasing debt either directly at government auctions alongside private investors or in the open market. Such moves could help renew investor confidence in countries' debt sustainability and bring yields down, Mr. Schäuble suggested.

"We can do whatever is possible within the framework of the EU treaties," said Mr. Schäuble, speaking in English in an hour-long interview late Wednesday.

He said Germany doesn't believe in the efficacy of throwing more money into a firewall to fight financial contagion. Europe and the International Monetary Fund now have some $2 trillion in resources as a global firewall, said Mr. Schäuble, as he called for ending the discussion over building an even higher firewall.

"It does not make sense to open this discussion over and over again," he said. "In the end, the firewall can only be the vehicle to give the countries in focus the time to do the necessary reforms, and that is what we must aim for."

Germany's price for accepting common debt issuance is a euro-zonewide agreement to transfer control of budgets to the European Commission. Mr. Schäuble repeated a call to establish a fiscal-policy commissioner, or budget czar, in Brussels with broad power over countries' finances.

Under the German proposal, the new commissioner could strike down national budgets if they weren't in line with monetary union rules and sanction profligate member states with fines and other measures. Until such controls are agreed, European states can't be made liable for each other's debts, Mr. Schäuble said.

Write to William Boston at william.boston@dowjones.com and Matthew Karnitschnig at matthew.karnitschnig@wsj.com