Germany has stated its exorbitant price for keeping Greece in the euro and agreeing to mass bond purchases by the European Central Bank.
8:39PM BST 16 Oct 2012
There must be an EU “currency commissioner” with sweeping powers to strike down national budgets; a “large step towards fiscal union”; and yet another EU treaty.
Finance minister Wolfgang Schaeuble dropped his bombshell in talks with German journalists on a flight from Asia, and apparently had the blessing of Angela Merkel, the chancellor. “When I put forward such proposals, you can take it as a given that the chancellor agrees,” he said.
Officials in Brussels reacted with horror. “If that is the demand, they are not going to get it. Nobody in the Council wants a new treaty right now,” said one EU diplomat.
“We’ve got the fiscal compact and quite enough fiscal discipline. Not even the Dutch want a commissioner telling them how to tax and spend,” he said.
The new demands risk another stormy summit in Brussels on Thursday, pitting Germany against the Latin bloc. The last summit in June ended with an acrimonious deal in the small hours on a banking union that began to unravel within days.
Mr Schaeuble said the currency chief should have powers similar to those of the EU’s competition commissioner, a man “feared around the world”.
The competition Tsar is the arch-enforcer of the EU machine, with powers to launch dawn raids, deploy SWAT teams, and block mergers on his own authority. The job was the making of Italy’s Mario Monti a decade ago when he blocked the GE-Honeywell merger after it had been cleared by Washington.
The Schaeuble plan is highly provocative. The EU can set deficit targets but it cannot manage budgets, unless a country requests a bail-out and gives up fiscal sovereignty.
Nor is it clear how Germany’s constitutional court would react. It ruled last year that the Bundestag’s budgetary powers are the bedrock of democracy and cannot be alienated to any supra-national body.
Mr Schaeuble poured scorn on counter-proposals by EU president Herman Van Rompuy, including a first step towards debt pooling through joint “eurobills”. The term “Fiskalunion” in Berlin has a specific meaning: more power to police the affairs of debtor states. It does not mean debt mutualisation or a joint EU treasury. Germany has so far refused to cross this Rubicon.
Michael Link, the country’s Europe minister, said Mr Van Rompuy’s plans are dead on arrival. “When you make proposals that are simply unacceptable for certain members, this will only give the impression of division. You can phrase it any way you like, ‘treasury bills’, ‘debt-redemption funds’ or ‘eurobonds’, this type of debt issuance will not fly with our government. We have always said this very clearly.”
The comment invited a barbed retort from his French counterpart, Bernard Cazeneuve. “Well, for us, it is ‘yes’, just as clearly,” he said. Such an open rift between Germany and France on the eve of a summit is rare.
However, Berlin has softened its line on a rescue for Spain, suggesting that Madrid may be able to tap a precautionary credit line with “limited conditionality”, instead of forcing it to accept an EU-IMF Troika regime.
Michael Meister, Mrs Merkel’s key fixer in the Bundestag, told Bloomberg that German legislators might be open to the idea, “but one thing is clear: whatever is requested, it won’t be without conditions”.
Spain is quietly trying to find out what those terms might be. Demands for public-sector job cuts would set off a storm. “It’s all down to haggling over the price,” said Steven Englander from Citigroup.
Huw Pill, from Goldman Sachs, said Germany has, in fact, allowed “veiled” debt mutualisation through its share of €750bn (£607bn) of bail-out liabilities. Less visibly, it has let the ECB boost its balance sheet to 32pc of GDP, even before it embarks on “unlimited” purchases of Club Med bonds. This includes a €1 trillion lending blitz to banks, and more than €200bn of bond purchases.
The Bundesbank has also accepted €750bn in claims from EMU peers under the ECB’s internal Target2 payment system. These claims rotate risk from banks to the German taxpayer. “The Bundesbank’s Target2 balances need to be evaluated carefully. They do represent a real German exposure towards the periphery: they cannot be dismissed as mere accounting entries,” said Mr Pill, who helped create the Target2 system.
It is precisely for this reason that Swiss rating agency I-CV stripped Germany of its AAA rating last month. “Germany has taken on contingent liabilities of €2 trillion. When you create these backstops, the money comes from somewhere and it can all go wrong,” said I-CV’s Rene Hermann.
Germany is in deeper than it likes to tell its own people.