Germany: Europe faces a string of political and legal tests this week that could hurt efforts to resolve its sovereign debt crisis and increase pressure for governments to try more radical solutions.
A court ruling may reduce the freedom of the German government, the biggest contributor to the euro zone’s bailout fund, to finance rescues of crisis-hit countries such as Greece.
The European Central Bank, internally split over its bond market intervention to protect Italy, is expected to review the programme. And Greece will find out how successful it has been in persuading private investors to take part in a bond swap designed to cut its €340 billion debt mountain.
None of these challenges looks likely to doom policymakers’ frantic attempts to keep indebted euro zone countries afloat while they try to regain the confidence of financial markets.
But this week’s events may underline how vulnerable those attempts are to worsening political currents in the euro zone, and how far the 17-nation bloc remains from finding a lasting solution to the debt crisis.
On Wednesday morning, Germany’s Federal Constitutional Court will deliver its ruling -- awaited for over a year -- on suits claiming Berlin is breaking German law and European treaties by contributing to multi-billion euro bailouts of Greece, Ireland and Portugal.
Legal experts think the court is highly unlikely to block the contributions altogether. But it is expected to give the German parliament a bigger say in approving them.
With German public opinion turning against providing more aid to Europe -- a survey published last week suggested two-thirds of Germans think parliament should not ratify more money for the bailout fund -- that could be a dangerous concession. At the very least, it might further slow and complicate Berlin’s responses to the debt crisis.
It could also encourage parliamentary opposition to bailouts in other disillusioned euro zone states. In Slovakia on Sunday the head of a junior party in the ruling coalition said the Slovak parliament would not vote on expanding the powers of the regional bailout fund, the European Financial Stability Facility, before December at the earliest.
Euro zone officials have been hoping national parliaments around the bloc will finish approving the EFSF reforms by early October. The threatened delay in tiny Slovakia may not be disastrous -- diplomatic pressure may be put on Bratislava to speed up approval, or a legal subterfuge found for the EFSF to use its new powers pending Slovak approval -- but it underlines how the bloc’s crisis plans rest on shaky political ground.
Politics have also turned ugly in some of the euro zone countries which need aid. The ECB’s monthly policy meeting will grapple with this on Thursday as it debates how to handle Italy.
Early last month, the ECB’s 23-member governing council decided to begin buying Italian government bonds to prevent a disastrous jump of their yields, overriding the opposition of a small minority of council members who felt this compromised the central bank’s monetary policy.
The ECB’s intervention was launched on the understanding that Italy would rush through an austerity plan to regain market confidence. But efforts by Prime Minister Silvio Berlusconi’s embattled government to do this have been plagued by disputed figures, policy u-turns and cabinet rows.
Now the ECB will have to decide whether to continue its bond-buying -- or whether the purchases are actually worsening the situation by reducing pressure on Italy to reform its finances. Italian bond yields have started rising back in the past week; some traders think the ECB may deliberately be permitting this in an attempt to obtain leverage over Rome.
The ECB is widely expected to maintain a substantial level of bond-buying in coming weeks because an Italian yield surge could de-stabilise the whole region. But it may not purchase enough to keep yields at comfortable levels for Italy, especially if the strengthening of the EFSF is delayed and the fund is not able to take over buying in October as hoped.
Meanwhile, Greece has set a deadline of Friday afternoon for European banks to express their interest in its bond swap; the banks will be required to commit by mid-October.
Athens wants €135 billion of outstanding bonds to be swapped or rolled over, which translates to a high take-up rate of 90%. It has warned that the whole scheme, and conceivably even its plan to receive a second international bailout, could be threatened if that target is not hit.
Greece appears likely to come close enough to the 90% threshold to declare the operation a success; the chief executive of Intesa Sanpaolo, Italy’s biggest retail bank, said on Saturday he was hearing positive indications from the Institute of International Finance banking lobby group.
But even if the debt swap is fully taken up, analysts think that combined with other planned measures, it will only produce a drop in the ratio of Greece’s debt to its gross domestic product to around 120% or 130% over the next few years, from above 150% now. So another, more painful Greek debt restructuring may be inevitable down the road.
This helps to explain why markets are unlikely to react with much optimism even if events this week turn out positively -- and why a growing number of past and present policymakers are advocating more radical crisis steps.
European Commission president Jose Manuel Barroso insisted euro zone policymakers were doing everything possible to resolve the crisis.
“I want to be clear here. The European Union and the euro are strong and resilient. We are doing all it takes,” he said on Monday in Australia after talks with Prime Minister Julia Gillard.
Still, Italian economy minister Giulio Tremonti repeated his call on Sunday for euro zone governments to issue bonds jointly, saying the measure was vital to resolve the crisis. Germany has strongly resisted the idea on the grounds that it would penalise financially responsible countries.
Former German chancellor Gerhard Schroeder on Sunday called for the creation of a “United States of Europe”, saying the bloc needed a common government with a unified budget policy to avoid future economic crises.
Schroeder, a Social Democrat who ran Germany from 1998 to 2005, said European Union member states would have to return to the negotiating table and hammer out a new treaty covering the bloc’s institutional framework.
Steen Jakobsen, chief economist at investment bank Saxo Bank, said governments had great political will to protect the euro zone, and were likely to take drastic action eventually to head off disasters such as an Italian exit from the zone.
But for this to happen, he said, “Germany needs to step up to the plate in a way it has not done so far.”