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Germany moves ahead with eurozone measures

Wednesday, September 12, 2012    

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BERLIN, Germany - EUROPE'S financial crisis looks less menacing than it has in many months, but the steps taken by countries most threatened by high debts and weak economies aren't the main factor.

What has changed more than anything else has been German Chancellor Angela Merkel's willingness to put her country's financial resources — and pride — on the line to help save the euro currency union.

The backlash from some quarters — including inside her own party — has been fierce, yet for Merkel there appears to be no turning back. At stake is the concept of European unity that has been at the heart of German foreign policy since the end of World War II.

"There has been a very clear criticism of Merkel's government that she always addressed European policies from the national perspective, but in my opinion she's not doing that, at least not in the last few months," said Julia Langbein, a political scientist at Berlin's Free University. "She's attempting to keep this European project going and not to let the euro go down, despite tough political criticism."

Most recently, Merkel has stood behind an ambitious plan by the European Central Bank to buy unlimited amounts of government bonds to help lower borrowing costs for countries struggling to manage their debts. As Europe's biggest economy, Germany has more at stake than anyone else if countries default on their bonds and the ECB is forced to take losses.

By contrast, the reactions to the ECB plan from some German media and politicians, and the head of the country's central bank — who fears runaway inflation will follow — were strongly negative.

Rainer Bruederle, the parliamentary leader of Merkel's Free Democrats coalition partners, said it was "fatal to keep buying up new bonds from indebted countries".

Bundesbank President Jens Weidmann said heavily indebted countries would be less likely to adhere to austerity measures because "central bank financing can become addictive like a drug".

Germany's top-selling Bild newspaper proclaimed that Draghi had issued a "blank cheque for indebted countries."

Merkel's support for the ECB's controversial bond-buying plan is the latest example of where she has taken a more pragmatic and flexible approach to the eurozone's problems than she appeared willing to do earlier on in the crisis that began nearly three years ago.

At a summit in Brussels in June, European leaders agreed to a bold plan to pump cash into troubled banks, reduce borrowing costs for Italy and Spain and stop forcing austerity on every government that needs aid. The agreement was only possible after Merkel agreed to measures that months earlier she said she would not accept.

When it comes to Greece, Merkel still insists on tough austerity in exchange for aid, but she has guided German officials to take a softer tone publicly. She has admonished members of her governing coalition who've said the eurozone would be better off without Greece and said it "made one's heart bleed" to see the Greek people struggling in the face of pension cuts and other burdens for the good of their country.

Today, Germany's Federal Constitutional Court — which is akin to the United States' Supreme Court — is expected to allow Germany to ratify the (euro) 500 billion ($57 billion) permanent bailout fund for Europe called the European Stability Mechanism and Europe's new budget-discipline pact.

The court case was brought by a broad coalition of critics of the deal who claim the pact — that was drawn by Merkel and the other eurozone countries in December 2011 — unduly limits the German Parliament's ability to control the country's budget.

While backing various measures aimed at helping struggling countries, Merkel hasn't let up on insisting that eurozone members stick to tough fiscal targets. The way the permanent bailout fund is structured Germany has a de facto veto over applications for emergency funding. Voting rights are weighted according to contributions, and since Germany is guaranteeing 27 per cent of the (euro) 700 billion coming from across Europe, it is impossible for an emergency application to gain the approval needed unless Germany is on board.

"Without Germany, it doesn't happen," Langbein said.

The same can be said for the ECB's bond-buying plan. The programme announced by ECB President Mario Draghi on Thursday says countries that want the central bank's help must first request emergency aid from the bailout fund controlled by Germany and the 16 other nations that use the euro.

While the ECB plan is the most significant step to date in stemming Europe's financial crisis, the region's economic problems are far from over: the 17-country eurozone has six countries in recession and unemployment across the region is at 11 per cent. The budget-cutting that countries are implementing to reign in their deficits is only going to make matters worse in the near-term.

Still, European financial markets have been relatively calm all summer. They have enjoyed an extra boost ever since Draghi hinted and Merkel signaled her approval of the bond-buying program. Back in July, the interest rate on Spain's 10-year bonds was 7.54 per cent — now they are back down to 5.64 per cent. Italy has seen a similar drop — from 6.36 per cent to 5.02 per cent.

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