Some German ‘red lines’ may not be so red as euro meltdown looms

BERLIN: At first sight, Germany appears to have blocked all exits from the eurozone’s blazing sovereign debt inferno. On closer inspection, some German “red lines” may be less red than others. If Chancellor Angela Merkel wins acquiescence from European Union partners to a treaty change Berlin is seeking to impose intrusive fiscal discipline on “debt sinners,” aides hint she will permit bolder measures to fight the crisis.

Those could include more European Central Bank buying of stressed countries’ bonds in the short run, in tandem with bond insurance by the eurozone rescue fund, and accepting the idea of common eurozone “stability bonds” as a long-term goal.

“Common stability bonds in my eyes are neither good nor bad as such,” said Peter Altmaier, parliamentary business manager of Merkel’s Christian Democrats (CDU) and one of her most seasoned European policy experts.

“It depends entirely on the conditions and the use,” he told Reuters in an interview.

In a flurry of recent statements, Merkel has opposed all the widely mooted short-term options for decisive action to stop an accelerating debt market meltdown.

“The current Catch-22 is that all good solutions for the euro crisis are not legal in Germany,” said Ulrike Guerot, head of the Berlin office of the European Council on Foreign Relations think tank.

The chancellor has said the EU treaty bars the ECB from acting as a lender of last resort and printing money to buy government debt. She has rejected joint “euro bonds,” dismissed a proposal to mutualize the eurozone’s debt stock, and rebuffed attempts to allow the bloc’s rescue fund to borrow from the ECB or the IMF.

Yet at the same time, she declared this week that the only answer to the crisis was “more Europe” and won endorsement from her party to press for a fully fledged European political union based around the eurozone.

The official line in Berlin is that eurozone weaklings must do their homework by adopting austerity measures and tough economic reforms to recover lost competitiveness, and that the bond market will calm down when they do so.

Bundesbank president Jens Weidmann has taken an even harder line, saying the ECB should be looking to stop its current limited purchases of troubled countries’ bonds because it is dulling the market incentive to carry out those reforms.

Finance Minister Wolfgang Schaeuble said Friday neither eurozone governments nor financial markets should expect the ECB to step in and solve the sovereign debt crisis alone.

“There is no pressure on the ECB to unleash all [its] firepower,” Schaeuble told a European Banking Congress. “If we did that, calm would last for a few weeks at most.”

Determined not to be pushed around by financial markets, Merkel seems reluctant to acknowledge in public the urgency of the threat to the survival of the eurozone.

The borrowing costs of almost all eurozone states, even those previously seen as safe such as France, Austria and the Netherlands, have spiked in the last two weeks as panicky investors dump paper no longer seen as risk-free.

Italian bond yields have leapt to levels above 7 percent widely seen as unbearable over the long term despite on-off intervention by the ECB to buy limited quantities.

Yet German officials see the higher bond yields as a boon because they are forcing governments from Rome to Paris to push through long overdue fiscal and structural reforms. They want to see more such reforms, including from the French.

One Berlin source described the bond market as an “ally” in that drive.

Echoing Merkel, German media and politicians are more focused on Berlin’s battle to impose German fiscal discipline on its partners than on the risk of a eurozone meltdown.

“No grounds for hysteria,” the Bild daily proclaimed Friday.

Altmaier said Merkel wanted to make European partners finally live up to the fundamental trade-off that underpinned the birth of the single currency.

“When the euro was introduced by the Maastricht treaty in 1992, there was a historic compromise,” he said.

“The awfully strong deutschemark was abolished, and German stability culture would be implemented Europe-wide. The first part was implemented. The second part is still valid and binding in the treaty, but it hasn’t yet been implemented.”

Merkel is impatient to get the 440 billion euro ($600 billion) European Financial Stability Facility up and running as an insurer of eurozone bonds.

Once it is operational – the target date is early December – and investors see eurozone governments busily doing their “homework,” she seems to believe markets will settle down.

Some of her advisers are privately less sanguine.

“I think time is running out,” one senior aide said, speaking on condition of anonymity. “Something has to be done. It’s a question of weeks.”

Asked if that might entail larger-scale ECB bond buying without the central bank “sterilizing” all its purchases by taking in equivalent amounts from the market at tenders, another official said that was “a decision for the central bank. You won’t hear us say anything against that.”

The government might not object, but the Bundesbank, with its historic opposition to “printing money” at the risk of stoking inflation, would be likely to oppose such a move vehemently, a central bank source said.

The only exception might be if recession were causing a sharp contraction in the money supply, he said, adding: “We’re not there yet.”

Germany does not want to show its hand on crisis management steps until it has secured commitments from its partners to the changes Merkel seeks in the EU treaty to entrench intrusive fiscal supervision.

An amended article would create a European budget tsar, unofficially dubbed the “Sparkommissar” (savings commissioner), with the power to annul eurozone governments’ budgets if they breach EU fiscal rules.

The watchdog would be able to haul delinquent governments before the European Court of Justice, which could impose fines and order compliance, as in competition and antitrust cases.

Schaeuble has said Germany wants that amendment in place by the end of next year. Merkel’s vision of a closer political union would be the object of a second phase of treaty change starting with a parliamentary convention perhaps in 2013, officials said.

Guerot worries that Berlin, once the gentle giant of Europe, is now bullying its partners in a way that will store up decades of resentment and hostility.

“This will backfire on us terribly in two or three years time. Do we think everyone will continue to like us, buy BMWs and welcome us on their beaches if we go on behaving like this?” she asked.

But Altmaier says pro-European Germans, like himself, have had their fingers burned by watching former Italian Prime Minister Silvio Berlusconi go back on his promises as soon as the European Central Bank started buying Italian bonds.

A version of this article appeared in the print edition of The Daily Star on November 19, 2011, on page 5.




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