published Saturday, September 17th, 2011

Germany faces unappetizing choices in euro crisis

By GEIR MOULSON

Associated Press

BERLIN — German Chancellor Angela Merkel says that “if the euro fails, Europe fails.”

But as the debt crisis intensifies, the leader of Europe’s biggest economy is sticking to a course of gradual action that markets are losing faith in and refuses to take the radical measures some say are needed to keep the currency afloat.

Top officials, even in the European Central Bank, have called for a “quantum leap” in tackling the crisis. One option often mentioned by economists is issuing eurobonds, debt backed jointly by all eurozone nations.

But Merkel faces intense pressure at home to not expose her nation any more to the shaky finances of countries like Greece, leaving Germany — and Europe — in an uncertain position.

Merkel has so far justified the high cost of bailouts by noting that Germany’s interests as a leading exporter are bound to the wider eurozone. Its banks also are exposed to the fates of the countries.

The strategy she has led Europe to take has been to provide struggling nations with loans, in exchange for tough austerity measures. The powers of the eurozone bailout fund will also be increased to help stabilize debt markets.

But after multiple bailouts — Greece, Ireland, Portugal and then Greece a second time — taxpayers in Germany and other Northern European countries are losing confidence in the current crisis management.

And so are markets. Prices in Greek debt markets show investors are all but resigned to the fact the country will default on its debts.

But Merkel has rejected suggestions that more drastic measures might solve the situation. She has brushed away the notion of abandoning Greece to default or creating a full-scale fiscal union, in which German funds would directly plug funding gaps in other countries.

Many people feel the need to believe it “could evaporate with one buzzword — be it eurobonds or insolvency or other words,” Merkel says. But “that won’t happen.”

She says resolving the crisis will be “a slow, hard road,” involving deficit cuts and economic reform to make stragglers more competitive.

That has dampened investors’ expectations that a change of strategy might be presented at a meeting of eurozone finance ministers in Wroclaw, Poland, on Friday and Saturday.

Merkel pointed out that even if she were for the introduction of eurobonds, they could be unconstitutional in Germany and require years of renegotiations to European treaties.

Merkel “is between a rock and a hard place,” said Louise Cooper, an analyst at BGC Markets. “Clearly Merkel does not want to be the ... chancellor in Germany who was in power when the euro project blew up. But quite what she can do to prevent it, I am not at all sure.”

Prominent authorities, however, have warned Germany and Europe need to make up their mind on what they want the eurozone to be.

Jens Weidmann, the head of Germany’s hawkish central bank and once Merkel’s economic adviser, said there was a choice. On the one hand Europe could have a system under which countries are largely barred from taking responsibility for others’ debts and the markets discipline governments that spend too much. On the other, the region could take “a major leap” toward deeper integration.

“The decision for one of the two paths needs to be taken soon,” Weidmann argued. The current situation, in which government finances are separate but get rescued in times of need, risks failing, he said.

The European Central Bank president, Jean-Claude Trichet, said the eurozone should eventually create a common finance ministry to bind together the nations’ budgets.

Germany, whose political class views itself as a driver of European unity, could hardly countenance the idea of the European project failing — quite apart from the steep financial costs.

Michael Meister, a leading lawmaker in Merkel’s party, argued against speculating about even a partial eurozone break-up. “It would be an absolute fiasco for an export nation like Germany,” he argued. “We have to consider that we’re discussing not just Greece, but our own economic prospects.”

But Merkel’s conservatives oppose eurobonds, and their junior coalition partner, the Free Democratic Party, is vehemently against them. They argue eurobonds would merely push up financially solid Germany’s lending costs and encourage others to run up more debts, as well as facing legal barriers.

Germany’s main opposition parties — who currently have a majority in polls — have advocated at least their limited introduction, arguing that other avenues could be more costly.

But that would likely cause trouble with Germany’s Federal Constitutional Court.

One implication of its recent ruling upholding Berlin’s participation in the bailouts so far was that “participation in an automatic and unmanageable guarantee mechanism, which might include the issuance of eurobonds, is not allowed,” UniCredit analyst Alexander Koch said.

While eurobonds remain off the menu of options to alleviate the crisis, Merkel can expect the main opposition parties’ support, at least for now, in pushing through the steps eurozone leaders have so far agreed on.

Markets will take some comfort in the notion that Germany, while unable to propose a lasting solution, is willing to keep supporting the eurozone’s system of bailouts.

“Germany is the lead actor in this film,” said Cem Ozdemir, a leader of the opposition Greens. “If the lead actor in a film stops playing, then the film’s over.”

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sangaree said...

I read an article recently where the U.S. might just bail out Europe and save the euro.

September 17, 2011 at 6:26 p.m.
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