Merkel holds the fate of the euro in her hands

The eurozone crisis hasn’t gone away, you know. The next few months will determine whether the region has a future or whether a painful break-up becomes unavoidable.

It is no exaggeration to say that German chancellor Angela Merkel will decide the fate of more than 500m people.

The sense of foreboding about the imminent demise of the single currency that prevailed for much of 2011 and 2012 was staunched by ECB president Mario Draghi at the end of last summer.

His comments, last July, that he “would do whatever it takes to save the euro” brought calm to the markets. He followed this up in September, unveiling the outright monetary transactions programme, which pledged unlimited purchases of short-term debt of any member state on condition of agreeing to structural reforms.

If outright monetary transactions were a character in a movie, it would be Keyser Söze in The Usual Suspects. Nobody ever sees it, just the knowledge that it is there is supposed to put manners on the naysayers.

The problem is that because of EU treaties, the ECB is limited in what it can do. If the crisis flares up again, the ECB could not save the euro simply because it is barred from monetising debt.

The first major challenge is designing a banking union that is fit for purpose.

Take the example of Ireland. This country was running a budget surplus and a debt-to-GDP ratio of 25% prior to the collapse of the banking system. The €64bn cost of bailing out the banks was a huge factor in blowing the public finances.

Now the country is highly indebted, which means it cannot afford to backstop further bank losses. Ditto for Spain, Italy, Greece, Portugal, and other member states.

A big part of solving the eurozone crisis is breaking the link between bank debts and national governments. That was the original premise for banking union. As well as a single supervisory mechanism, there would be a single resolution mechanism.

The single resolution mechanism would have the ability to close banks where necessary or, if a bank needed to be recapitalised, the money would come from the ESM or a common resolution fund.

Berlin is implacably opposed to this last proposal. Merkel wants responsibility for recapitalising banks to remain with national governments. Ireland will conduct stress tests of its banks later this year, while the other eurozone members will carry out stress tests in the first quarter of next year. There is a view that the results will show a multibillion-euro shortfall.

Bankrupt countries will not be able to stump up the necessary funds, which is likely to send the markets into convulsions. The EU summit later this month will be a showdown between the EU commission and the German government.

The commission is pushing for a single resolution mechanism with the ability to recapitalise banks through the ESM.

If Berlin gets its way, then the region’s future looks extremely bleak.

The German federal elections are obviously playing a huge part in its negotiating position. Anything that resembles a transfer union is electoral kryptonite.

But these are the realities of a currency union. It is right that there is a focus on improving competitiveness and reducing debt. But current account imbalances are inevitable in the eurozone.

Unless there is some sort of transfer mechanism to help out ailing members, then the region will lurk from one crisis to another until the euro unravels.

It really is time that Germany learned the lessons of the past. After all, no other country has been bailed out more by its European neighbours.