The euro zone has taken another major step toward easing its years-long crisis, as Germany clearly becomes convinced that keeping the monetary union intact would be far less costly than a partial breakup.
“This is a good day for Germany and a good day for Europe,” German Chancellor Angela Merkel declared Wednesday after the country’s constitutional court supported a rescue fund aimed at backing stressed countries in the 17-member union.
A year ago, Germany was cast as the agent of the euro zone’s potential breakup. Now, with the court ruling, it appears bent on becoming its saviour.
The court, Germany’s highest, removed an injunction that would have blocked the launch of the €500-billion ($630-billion) European Stability Mechanism, or ESM, the permanent rescue fund set to come into effect next year. Economists and politicians agreed that upholding the injunction would have triggered market chaos, sending the sovereign bond yields of distressed countries, notably Spain and Italy, to unsustainable levels.
The court’s preliminary approval of the fund, with conditions aimed at protecting the German taxpayer from unlimited liability, cheered investors and lifted the euro to a four-month high. German Chancellor Angela Merkel was pleased by the decision. “This is a good day for Germany and a good day for Europe,” she told German lawmakers.
The ruling marked the second major development in as many weeks after the European Central Bank last week unveiled plans to help push down borrowing costs in embattled countries like Spain and Italy by buying their bonds. The program, called Outright Market Transactions, would buy short-term paper, while the ESM, in concert with the central bank, would buy long-term bonds.
That had the tacit approval of the German government, though not Germany’s central bank.
The court decision came only a week after the European Central Bank agreed, with the German government’s tacit approval, though not that of Germany’s Bundesbank, to buy sovereign bonds in an effort to bring down their yields. The program, called Outright Market Transactions, would buy short-term paper while the ESM, acting in concert with the ECB, would buy long-term bonds.
Not long ago, Germany was throwing up roadblocks to measures that many argued were necessary to take the edge off the euro zone’s debt crisis and keep the region intact.
While Ms. Merkel urged a banking union that would see the joint supervision of banks, she condemned the idea of euro bonds, which would pool the sovereign debt of euro zone countries, and had grave reservations about adding to the list of sovereign bailouts and allowing the ECB to stray from its central role as an inflation fighter. The Bundesbank, Germany’s central bank, was – and remains – especially critical of bond purchases by the ECB, arguing that it was a violation of the ECB’s mandate of avoiding the direct financing of governments.
Ms. Merkel was also worried about giving the ESM essentially unlimited firepower, for fear of exposing the German taxpayer to theoretically unlimited losses should the debt crisis snare more victims.
The constitutional court’s approval of the ESM signals that Germany is convinced that keeping the euro zone intact might be far less costly that allowing some of the weakest countries, such as Greece, Portugal and Ireland, each of which has been bailed out, to exit the zone.
“We are an important step closer to our goal of stabilizing the euro,” German Economy Minister and Vice-Chancellor Philipp Roesler told reporters after Wednesday’s ruling.
Economists said Ms. Merkel was handed a double victory by the court because it approved the fund and attached conditions that protect the German taxpayer.
The court’s main stipulation was to cap Germany’s ESM liability at €190-billion – €21.7-billion of paid-in capital and €168.3-billion of callable capital. To ensure the ESM is accountable to the public, any increase beyond that amount would have to be approved by a full vote in the German parliament.
The ruling means the ESM, equipped with its full €500-billion, will be able to hold its inaugural board meeting on Oct. 8.
Economist Holger Schmieding of Berenberg Bank called the ruling “another big step toward defusing the euro crisis,” adding that a “gradual return of confidence could enable the German economy to rebound by the end of the year from its current stagnation and the euro zone to start expanding gradually in early 2013.”
But faltering euro zone growth may mean the worst is not over. As gross domestic product sinks and national debt loads rise along with the jobless rate, the odds of Spain and Italy seeking bailouts have increased. Spain has already requested a €100-billion bailout for its banks.
And, some observers said, there are questions about just how successful the ESM can be.
“The ESM and ECB can only address one symptom of the crisis – high borrowing costs – rather than the underlying causes of chronically weak growth and cripplingly high debt,” said Jonathan Loynes of Capital Economics. “Another obstacle has been negotiated, but the path ahead is far from clear.”
The euro zone, as a whole, is back in recession. The ECB expects the region’s GDP to contract by as much as 0.6 per cent. Italy and Spain are in deep recession and France’s growth has been zero per cent for the past three quarters.
The ruling came as Dutch voters went to the polls in a general election, which pits broadly pro-Europe parties against several strong Eurosceptic parties. A victory by the Eurosceptic parties – an unlikely scenario according to the latest polls – would probably turn a key creditor country into a foe of further euro zone bailouts and integration The German court ruling also came as the European Commission, the European Union’s executive arm, unveiled plans for common banking supervision that would make the European Central Bank the supervisor of the national supervisors.