BERLIN (Madeline Chambers) - Germany's Finance Minister spelled out details on Saturday of his proposal for national redemption funds for excess sovereign debt which he intends to present at a crunch summit of EU leaders next week aimed at restoring confidence in the euro.
Wolfgang Schaeuble outlined his plans under which states would effectively siphon off a chunk of their debt to a special national fund and pay it off over about 20 years while committing to reforms to keep debt levels on target.
Schaeuble believes his proposal, which has won qualified support from Chancellor Angela Merkel, would boost confidence as states would be sending a signal they were serious about limiting debt levels to 60 percent of gross domestic product.
Investors are desperate for a sign from EU leaders next week that they can find a solution to the more than two year-old debt crisis which is having a knock-on effect on the global economy. Merkel is pushing for binding EU rules on budget discipline.
"We need a redemption fund in every single country of the euro zone," Schaeuble told the Passauer Neue Presse.
"Each of these countries should put into a special fund that part of its debt which exceed 60 percent of its GDP, and should pay that off with tax revenues. Over a period of 20 years, the debt should be reduced to 60 percent," he said.
In Germany's case, the fund - covering federal, state and municipal debts - would amount to about 500 billion euros ($672 billion) as German debt is around 80 percent of its gross domestic product, said Schaeuble.
An earlier proposal this month from a panel of independent economic advisers to the German government which was rejected as unrealistic by Merkel, envisaged a European Redemption Pact.
That proposal, for a fund of up to 2.3 trillion euros, was anathema to Merkel because it suggested pooling excess debt into a fund with common liability.
Germany is dead set against any pooling of responsibility for debt within the euro zone, arguing states must themselves tackle their debt problems.
Schaeuble's plan has already hit opposition from Austria. Finance Minister Maria Fekter said on Friday any proposals that resulted in gathering billions of euros from taxpayers would encounter problems in national parliaments.
Merkel's spokesman welcomed Schaeuble's proposal as "interesting," saying it could help rebuild investor confidence.
However, it is far from clear whether Merkel will push the idea. Her main focus is securing a deal on changing EU treaties to force states to be more rigorous in budget discipline.
Merkel meets French President Nicolas Sarkozy on Monday to hammer out details on the changes they hope leaders will agree to at the December 9 summit.
World stocks and European bonds made gains at the end of last week on hopes euro zone leaders may be moving closer to a comprehensive solution to the crisis.
Merkel, who told her parliament on Friday there were no quick fixes to the crisis, wants the EU to have greater powers to stop national budgets if they risk breaching the budget rules and to punish offenders.
Merkel's spokesman dismissed a report in Focus magazine which said Germany and France would if necessary let the euro zone break up and make agreements with individual governments if treaty changes could not be agreed between all members.
"The German government's goal is to strengthen stability in the euro zone as a whole through a common set of rules for stricter budget discipline," the spokesman told Reuters.
The German government wants as many members as possible of the 27-member EU to sign up to the changes. British Prime Minister David Cameron threatened on Friday to obstruct the Franco-German drive for swift EU treaty change.
Schaeuble reiterated Germany's opposition to common euro zone debt issuance in the newspaper interview, as did Economy Minister Philipp Roesler, leader of the Free Democrats (FDP), a junior partner in Merkel's centre-right coalition.
He told the Frankfurter Allgemeine Sonntagszeitung that there would be no euro bond under this government.
Schaeuble also reiterated Germany's stance that the European Central Bank was independent.
Former European Commission head Jacques Delors blamed Germany for insisting the ECB must not support debt-stricken members of the euro zone for fear of fueling inflation in an interview with Britain's Daily Telegraph.
The euro's troubles spring from "a combination of the stubbornness of the Germanic idea of monetary control and the absence of a clear vision from all the other countries," he said.
(Additional reporting by Andreas Rinke; editing by James Jukwey)Copyright 2011 Thomson Reuters. Click for Restrictions.