Germany under pressure on debt deals

There are increasing signs that Germany is preparing to change its attitude towards eurozone countries becoming liable for one another’s debts as intense efforts are being made to provide Spain with funding that will not trigger a sovereign crisis.

Pressure on Germany and on the eurozone generally was increased by the G7 conference call that included finance ministers, central bankers and EU economics commissioner Olli Rehn.

Just ahead of a planned trip to the markets by Spain tomorrow, their budget minister broke with the narrative coming from Madrid, saying the cost of borrowing had effectively shut the country out of the markets.

But prime minister Mariano Rajoy has been insisting it wants EU money to fund its banks without conditions being placed on the government and a troika review every three months — all rules in the EU’s bailout terms.

German chancellor Angela Merkel is trying to shepherd approval of both the fiscal treaty and the ESM treaty — the EU’s new permanent bailout fund — through the German parliament. The vote is not now expected to take place until Jul 1.

This reflects the suspicions of the SPD, the socialist party whose support she needs, as they want to see what growth compact comes from the Brussels summit on Jun 27. Her own party, the centre right CDU, is equally mistrustful, demanding that both treaties be voted on together.

Just as Mr Rajoy may have been preparing his citizens to accept a bailout in recent days, it now looks as though Germany might be doing something similar. While Ms Merkel has been talking about eurobonds as a possibility for the future after economic and political union that would require treaty change, others are driving the agenda forward.

One of the most vociferous has been Jorge Asmussen, her former minister and now German member of the ECB board of which he heads up policy. For months now he has been talking about a new vision for the future EU.

In the past few days he has increased the amount of detail while Berlin has been readily saying that banking union proposals coming from Brussels are moving along the right lines.

The best hope for giving Spanish banks a bailout is if the ESM changes its rules — as under Article 19, its board of governors composed of representatives from each country is allowed to do. However, under German national rules, any change by its governor would have to be approved in advance by the Bundestag.

Discussions are now taking place around having Germany agree to change the treaty, or at least to this change, and voting it through together with the ESM treaty and the fiscal treaty on Jul 1. The ESM could then be established immediately, even before its expected launch on Jul 15.

If the treaty is changed, this could clear the way for Ireland to change the nature of some of its bailout, substituting it with funds that would not show on the government debt, which is rocketing towards a 120% and questionable sustainability. But, if the provision was made just for Spain, it would require the Bundestag to vote on new Irish funding.

The media is reflecting the need for change with Der Spiegel saying the crisis has arrived on the German doorstep with the DAX falling together with confidence by purchasing managers, exports and domestic production with the crisis also affecting markets like China and the US.

“This makes it all the more important to finally grasp just how deeply mired in the crisis we are. When investors lose their trust in the eurozone and take their money out of Europe, Germany too will feel the effects.”

It says more radical steps than any proposed to date are needed as “without an economic government and a true fiscal union, the euro won’t survive… Ultimately, it also requires eurozone countries to be collectively liable for their debts.”