Wednesday, 7 September 2011

Germany backs bailouts – for now

The markets are breathing a sigh of relief today after Germany's constitutional court ruled that it is legal and in line with the EU treaties for the country to be bailing out its struggling Eurozone neighbors. But the jubilation may be short-lived, because in its ruling the court sewed a minefield of potential future obstacles that will have to be dealt with in the coming months.

The ruling was in response to a lawsuit from Eurosceptic German citizens who said the bail-outs of Portugal, Ireland and Greece to stem the European debt crisis are unconstitutional because the German parliament should have control over taxpayer money, rather than the European Central Bank. The court rejected that argument, saying Germany's participation did not amount to an excessive burden on the country's budget, nor did it constitute a significant transfer of power away from Berlin.

Germany is by far the largest contributor to the bailout funds. If the judges had sided with the challengers in this ruling today it would cast Germany's ability to participate in those bailouts into question, which in turn would have thrown the markets into turmoil. Instead, the announcement this morning sent European stocks shooting up. Amongst the German public, who are growing weary of what many perceive as Germans being on the hook for the profligate spending of their Southern neighbors.

But the celebration from the markets may be premature. In its ruling, the court also gave the German parliament's budget committee the ability to block participation in future bail-outs. This effectively gives this small committee a veto over future activation of the eurozone's bailout fund, the safety mechanism agreed by EU leaders earlier this year. It also seemed to imply that the introduction of Eurobonds, one of the measures being considered to save the euro, would be unconstitutional without treaty change.

For those who are afraid of future challenges to the bail-outs, they can take comfort in the fact that Germany's budget committee has so far towed the government line on this issue. But the question of the need for treaty change is a different matter. In her address to parliament today, German Chancellor Angela Merkel seemed to imply that in her view, treaty change is needed if the EU wants to establish closer economic union (such as the move to establish Eurobonds). She said "more Europe" is needed in order to save the euro, and in order to prevent Europe from collapsing, "treaty amendments can no longer be taboo in order to bind the EU closer together." She also pleaded with the German public to remember that the country's current wealth is due to the benefits that the EU and the euro have bestowed. "In the long term, Germany cannot be successful if Europe isn't doing well too."

But the question of establishing more long-term institutions providing economic cohesion in the eurozone now seems to moving toward a back burner as leaders focus on getting the second Greek bail-out approved by member states.. For now, it's full steam ahead with the bail-outs. And if/when those don't work, it won't be until the next crisis that economic union will be discussed again. According to most analysts, that next crisis is mostly likely just weeks, if not days, away.


Captain Kid said...

Tomorrow, there will be a debate on the bail-out in the Bundestag. The parliament will certainly support the bail-out but it will be crucial for Merkel's government to form an own majority. In the worst case she will need the votes of the SPD and the Greens (which are certain), which could lead to another collapsing coalition in Europe.

Cindy said...

I check your blog often, thanks for keeping me posted.