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Analysis: German coalition talks take British turn on Europe

A general overview shows members of Social Democratic Party (SPD) and Germany's conservative (CDU/CSU) parties before the start of coalition
A general overview shows members of Social Democratic Party (SPD) and Germany's conservative (CDU/CSU) parties before the start of coalition

By Paul Taylor

PARIS (Reuters) - Is Germany becoming more British about Europe?

While still incomplete, the European policy platform emerging from coalition negotiations between Chancellor Angela Merkel's conservatives and the center-left Social Democrats (SPD) appears to be strongly sovereignist.

Negotiators have even proposed allowing Germans to vote in referendums - previously taboo - on major decisions involving enlarging the European Union, transferring more powers to Brussels or committing more money at EU level.

Merkel's allies say that plan, which would clamp a new padlock on European integration on top of national referendum requirements in France on further EU enlargement and in Britain on any more transfer of sovereignty to European institutions, is likely to be quashed.

"The proposal won't see the light of day. We would be reducing ourselves to the level of British policymakers," Elmar Brok, a senior CDU figure in the European Parliament, told Reuters.

But the mere fact it has been floated is telling, as is the fact that the more pro-European SPD put it forward along with Merkel's Bavarian Christian Social Union (CSU) sister party.

The Social Democrats seem to be giving priority to domestic goals, such as achieving a national minimum wage, over European matters.

"Their key priority is to win a planned ballot of party members on the coalition agreement," said Ulrike Guerot, senior associate at the Open Society Initiative for Europe.

"That means paying attention to the concerns of blue collar workers who believe Germany is paying for others in Europe at the expense of looking after poor Germans," she said.

With the risk of a break-up of the euro no longer acute, the willingness in Berlin to contemplate bolder risk-sharing solutions has dissipated, especially with the anti-euro Alternative For Germany gaining ground in polls and Germany's constitutional court casting its eye over new EU policy measures.

Only a full-blown return to crisis is likely to change that, diplomats say.

In an attempt to undercut the anti-EU UK Independence Party, David Cameron has promised Britons an in/out referendum on continued EU membership in 2017 if he is re-elected in 2015 and after trying to renegotiate looser membership obligations.

BANKING UNION SHACKLED?

Even without a referendum lock, Berlin's would-be coalition partners have agreed to other restrictions on EU integration, limiting the scope of a planned European banking union by rejecting any common fiscal backstop for euro zone banks for the foreseeable future.

That means each member state will be liable for cleaning up its own banks if they have to be wound up after the European Central Bank, in its new role as single banking supervisor, conducts stringent asset tests next year.

As a last resort, a country unable to bear the cost could apply for a loan from the European Stability Mechanism rescue fund, but that would add to its national debt and come with the stigma of internationally supervised conditions.

Much further down the line, the plan is for a common resolution fund to be financed by the banks themselves.

The German parties also want a future agency charged with deciding whether to shut down troubled banks to be placed under the authority of European Union finance ministers.

That raises the possibility that Berlin could muster enough allies to block or alter decisions about failing banks.

The European Commission, backed by the ECB, has proposed itself as a politically independent resolution authority, whereas the German coalition plan would leave such decisions potentially subject to political discretion.

Senior lawmaker Herbert Reul, the CDU's chief negotiator on EU issues, said the coalition proposal was not "optimal" but necessary to avoid the legal basis for banking resolution being overturned by Germany's Constitutional Court, due to rule soon on the legality of the ECB's bond-buying program.

The German parties have also ruled out a common redemption fund for the legacy debts of euro zone countries, even though the SPD espoused the idea in its election campaign.

Given the timeline of the coalition talks, set to produce a government for parliamentary endorsement in the week of December 16, there will be little or no time left for negotiation with European partners before a December 19-20 EU summit due to reach political agreement on a single bank resolution mechanism.

"The risk is that Merkel will come to Brussels with her new coalition agreement and say 'that's our position, take it or leave it'," an EU official involved in preparatory talks said.

MULTIPLE MOVING PARTS

The coalition talks are just part of a three-dimensional chess game in which Merkel is simultaneously negotiating with euro zone partners on the future of European banking union, budget discipline, economic reform and debt management.

Reinforced by her election victory in September, the chancellor will go to Brussels demanding agreement on so-called competitiveness contracts in which euro zone states make legally binding commitments to economic reforms, Guerot said.

France has led resistance in preparatory meetings, arguing that the European Commission has only recently won sweeping power to review national budgets in the euro zone and countries need time to digest that change.

The French want Merkel to agree to create a common budget for the euro zone with significant resources. An economic study published by the French Treasury in October suggested this could be funded by corporate income tax and be used to pay a common unemployment benefit. Berlin rejects such notions.

Merkel has only agreed so far tentatively to the principle of a small "solidarity fund" that could reward stressed euro zone countries that carry out painful reforms of their labor markets, pension systems and welfare states.

"This might be for a Greece or a Portugal, not for France," the EU official said.

(Additional reporting by John O'Donnell and Jan Strupczewski in Brussels, Andreas Rinke and Noah Barkin in Berlin. Editing by Mike Peacock)

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