WE NEED a fiscal union," declared Joaquin Almunia, the EU Competition Commissioner, and he couldn’t have been more right. Euro-dollar has declined more than 300 points since last week, as renewed concerns about the fiscal viability of the union have once again put pressure on the single currency. The latest troubles stemmed from Finland and Italy: the former tried to work out a side deal with Greece by asking for collateral guarantees for the second round of bailouts, while the later reneged on its initial plans for an austerity budget, putting into question the Italian government’s commitment to fiscal discipline.
The conflict in the Eurozone is devolving into an “every man for himself” affair, and this antagonistic attitude that has pitted much of Northern Europe against Southern Europe is threatening to undermine the currency. German Chancellor Angela Merkel has staked her political future on the issue of Eurozone fiscal unity, but so far has suffered steep political losses for her views. Her party saw its fifth election loss this year after she failed to persuade voters in her home state of the need for further financial assistance to the troubled economies in the south.
Merkel’s Christian Democratic Union collected only 23.1 percent of the vote – its worst tally since voting began in the state after German reunification in 1990. The result means that Merkel’s national coalition has been defeated or lost votes in all six German state elections so far this year, as voters resist her attempts to pay more taxpayer money for Eurozone bailouts.
This week, the whole issue of bailouts may face further trouble from a surprising source. Today, the Bundesverfassungsgericht – the constitutional court of Germany – will rule on the constitutionality of bailouts in general. The lawsuit, presented by German academics and businessmen, argues that bailouts compromise the financial rights of the German parliament (Bundestag), and so undermine German democracy. If the court sides with the plaintiffs, it could create yet another political crisis in the Eurozone and push euro-dollar through the key $1.4000 level as fears of fracture escalate.