Brussels, 17/11/2011 (Agence Europe) - Any credible and lasting solution to the sovereign debt crisis will not be possible without Germany, the main contributor to the EFSF bailout fund, but the biggest eurozone economy is increasingly finding itself isolated and being demanded by its European and international partners to give the European Central Bank a greater role. Germany is also calling for changes to the EU treaty to boost budget discipline and macroeconomic surveillance, further increasing its isolation.
Not a day goes by without Germany refusing to allow the ECB to act as lender of last resort, while Spain and Italy see the yields on their long-term debt rise above the level considered to be affordable (7%). On Thursday 17 November, speaking in Berlin, German Chancellor Angela Merkel said that any political leaders who thought that the ECB could solve the euro crisis were wrong because there were only political solutions. The Germans argue that the ECB should not be held to ransom to save struggling countries, yet elsewhere in the world, like the United Kingdom and the United States, national banks always act as lenders of last resort. Germany says that any big intervention by the ECB would prevent the struggling countries from cutting public finance and introducing structural reforms, and would increase inflation - a bête noire in Germany after the experiences of the Nazis coming to power on the back of hyperinflation in the 1920s.
Germany is coming from a different starting point from its partners. French Economy Minister François Baroin recently said that the ECB was one answer and probably even a key part of the answer to the debt crisis. He pointed out that during the eurozone summit on 26-27 October, France had defended the idea of turning the EFSF into a bank so that it could be backed by the ECB, but Germany had gone for other options to increase the EFSF. Visiting Berlin on Wednesday, Ireland's prime minister, Enda Kenny, said that in the current circumstances, only the ECB had the ability to act as the necessary unlimited backstop against financial panic, but admitted that views in the eurozone differed widely on the matter. Countries in Southern Europe seem to agree that the ECB should take a bigger role. The former Italian prime minister, Silvio Berlusconi, said recently that the euro was the only currency that did not have a lender of last resort to defend it against attacks from the money market, unlike the pound, the dollar and the yen (EUROPE 10483). At the G20 in France earlier in the month, the United States applied pressure on Germany to get it to reconsider.
Changing the treaty. Berlin says it is prepared to abandon some of its sovereignty and agree to greater EU surveillance of national budgets, but says that changes to the EU treaty are needed to this end. On Thursday 17 November, Merkel suggested a very limited change to the treaty in the form of a protocol solely for the 17 eurozone nations to boost budget discipline but not, as suggested by other member states and the European Parliament, to pool a share of national debt in the form of eurobonds.
This idea is distinctly unattractive. In Berlin on Thursday, Danish Prime Minister Helle Thorning-Schmidt told Merkel she was unhappy about the idea of changing the treaty, saying that things should be done in the right order - solving the crisis first and discussing how to create more budget discipline later. Under pressure from a section of the Conservative Party that is calling for the UK to leave the EU, British Prime Minister David Cameron is expected to say much the same thing when he meets Merkel on Friday. Some countries, such as Poland (which holds the Presidency of the Council of the EU), are worried that greater integration of the eurozone nations will lead to a two-speed Europe and they want the countries planning to join the euro to be allowed to attend Eurogroup meetings and other negotiations. They urge the European Commission to defend the Community method and challenge the way decisions are forced on everyone by “Merkozy”.
Debating economic governance in the eurozone at the European Parliament recently, the president of the European Council, Herman Van Rompuy, said it was better to set the objectives before deciding on how to acheive them (EUROPE 10496). He said that a lot can be done under existing treaties, including the use of strengthened cooperation, and changes to the treaty take a long time because they all have to be ratified.
Embarassingly good health. Despite the sovereign debt crisis, Germany's economy is doing well with growth reaching 2.9% of GDP in 2011 (according to the European Commission's autumn forecasts -EUROPE 10493). The country will cut its debt from 4.3% in 2010 to 1.3% this year, and its public deficit from 83.2% to 81.7% over the same period. Any mistakes made in calculating Germany's public deficit are in the opposite direction from other member states because it recently discovered an unexpected €55 billion of additional income! Unemployment continues to fall and will be less than 6% of the working population in 2012. Merkel has therefore announced tax cuts - unlike the tax rises everywhere else - envied by other Europeans, who have to deal with lack-lustre growth, heavy levels of debt and high unemployment. France, for example, has recently announced cuts to meet its long-term budget commitments and make sure it keeps its triple A rating.
Rising spreads. Germany's good economic performance and its sickly neighbours are reflected in the bond spreads on the sovereign debt markets for the Eurozone, where the German Bund's interest rates are historically low while other countries' yields are rising. Spain and Italy are already under severe scrutiny from investors, but countries with excellent credit ratings, even the highest credit rating, are now coming under pressure. France is greatly exposed to the Italian economy and now has to pay twice as much as Germany to borrow money. Belgium has been instructed by the European Commission to agree on a government and issue its budget for next year by next week, and its ten-year interest rate is now hovering around the 5% mark. Even the cost of triple A-rated Dutch and Finnish debt is now higher than Germany's. (MB/transl.fl)