June 4, 2018 / 6:29 AM / 6 months ago

RPT-With Trump tensions high, Merkel reaches out to Macron on Europe

(Repeats Sunday item without changes)

* German leader spells out stance on euro zone, defence, asylum

* Merkel faced rising pressure to respond to Macron

* Trump threats and Italy turmoil raise stakes for Europe

By Noah Barkin

BERLIN, June 4 (Reuters) - Germany’s Angela Merkel has offered her most detailed response to French President Emmanuel Macron’s ideas for reforming Europe, seeking to avert a damaging rift with Paris at a time of high anxiety over Italy and growing transatlantic tensions.

With the clock ticking down to a European Union summit this month at which Merkel and Macron have promised to present a joint plan for overhauling Europe, the German chancellor gave an extensive newspaper interview on Sunday that touched on reform of the euro zone as well as defence and asylum policy.

She has faced mounting criticism in recent weeks for failing to engage with Macron, who campaigned on a pledge to reform Europe and has sketched out his ambitious vision in a series of speeches over the past year.

Pressure on the EU to show a united front has grown following U.S. President Donald Trump’s decision to pull Washington out of the Iran nuclear deal and to impose tariffs on European steel and aluminium exports.

Top exporter Germany is especially vulnerable to a trade conflict with the United States and several analysts said the threats from Washington had given the notoriously cautious Merkel added incentive to reach out to Macron.

“This is a typical Merkel move,” said Henrik Enderlein, director of the Jacques Delors Institut in Berlin. “She’s on the defensive, people say she’s not going to do anything, and then she pulls something out of her hat.”

CLARITY

In the interview with the Frankfurter Allgemeine Sonntagszeitung (FAS), Merkel offered clarity about Germany’s stance on a number of key issues:

* She backed the idea of turning the euro zone’s ESM bailout mechanism into a European Monetary Fund (EMF) that could offer short-term loans for countries suffering economic stress. She said the EMF should be able to assess the debt sustainability of member states and “the instruments needed to restore this if necessary” - a nod to debt restructuring, which France opposes.

* She backed the step-by-step introduction of a euro zone investment budget in the low double-digit billions of euros, saying this could be housed within the EU budget or outside.

* She called for common asylum standards, a European border police force and a pan-European migration agency that could evaluate asylum applications. Crucially, she backed a “flexible system” in which countries that refuse to take on refugees could compensate by making contributions in other areas.

* She backed Macron’s idea for a European intervention force with a “common strategic military culture”, opening the door to a more active German defence role.

ITALY

Merkel has been torn for months between compromising with Macron and satisfying conservative hardliners at home who accuse the French leader of seeking a “transfer union” in which countries that refuse to reform are rewarded with German money.

The creation of a populist, eurosceptic government in heavily indebted Italy last week has only reinforced this scepticism.

Macron and his allies argue that Europe will continue to be vulnerable to external shocks unless its rules and structures are fundamentally overhauled.

He has called for a far bigger euro zone budget than Merkel spelled out in her FAS interview and urged Europe to become a bolder, more autonomous actor in defence, a shift that unsettles conflict-wary Germans.

“What is good is that for the first time Merkel has said something precise about what she has in mind,” Philippe Martin, a former Macron adviser who heads France’s Council of Economic Analysis (CAE), told Reuters.

However Martin called Merkel’s ideas for the euro zone, which reject federalist solutions in favour of an intergovernmental approach, minimalist.

“It is the minimum so that there is no big rift between France and Germany at a time when it would be extremely damaging.”

Merkel and Macron are due to present their ideas at an EU summit on June 28-29. They will meet, together with their top ministers, at the Meseberg palace outside Berlin on June 19 to finalise their joint position.

Ahead of those meetings, a number of prominent voices had criticised Merkel for failing to respond to Macron. Former German foreign minister Joschka Fischer called her silence a “scandal” and Timothy Garton Ash, the author and Oxford historian, labelled it “pathetic”.

“We should be happy that Merkel has finally replied,” said Laurence Boone, chief economist at Axa and a former adviser to French President Francois Hollande.

“My sense is that she needs Macron now. Germany, with its trade surplus and car industry, is the country that is most vulnerable to Trump. Merkel has something to gain from European solidarity.” (Reporting by Noah Barkin Editing by Giles Elgood)

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