Stakes raised ahead of crunch day for Europe

THE Eurozone waits with bated breath as its fate is, once again, in the hands of its divided politicians. After Mario Draghi, European Central Bank (ECB) president, last week announced Outright Monetary Transactions (or OMT) – another acronym to add to the burgeoning Eurozone lexicon – traders were elated, sending shares in European stocks to six-month highs.

However, the policy has gone down like a lead zeppelin in Germany, where newspapers on both sides of the political spectrum panned Chancellor Angela Merkel for supporting it. “A blank cheque for debtor states” exclaimed Bild, warning that Draghi’s policies could make the euro “kaput”.

Merkel continues to publically support Draghi; Jens Weidmann, Bundesbank president, does not, claiming that the OMT is dangerously close to monetising sovereign debt, which is illegal under current European law. Weidmann was the only ECB board member to vote against the OMT. It is rumoured that he had previously threatened to resign in retaliation to the ECB’s loose monetary stance, as did his predecessor, Axel Weber, in April 2011.

These nuances of German politics are significant: tomorrow, its constitutional court, based in Karlsruhe, rules on the legality of the European Stability Mechanism (ESM), the €500bn permanent bailout fund and successor to the European Financial Stability Facility (EFSF), the temporary €440bn facility, due to expire next year.

Due to concerns as to whether the ESM is compatible with the Treaty of Lisbon, Germany proposed an amendment, which requires a change in the Basic Law (Germany’s constitution). The Basic Law stipulates that only German parliament can control national budgets and limits the influence of foreign entities. Clearly, the ESM and the “fiscal compact” go against the grain of the constitution: they could require intervention to limit national debt and budget deficits if a country faced financial difficultly and requested assistance.

The ESM requires 90 per cent of those who are committing capital to ratify it. If the constitutional court does not give it the rubber stamp, the ECB’s ability to buy bonds would be undermined. The euphoria that the markets enjoyed last week would evaporate in an instant, unwinding the ECB’s rescue efforts.

Nothing is ever straightforward as far as the Eurozone is concerned. Matters have been further complicated by a German MP, Peter Gauweiler, lodging a complaint at Germany’s top court, urging the constitutional court to delay their ESM decision until the ECB has withdrawn its commitment to OMT: “The ESM, insofar as it is constitutionally viable at all, should only come into force when the ECB has taken back its self-awarded power as a hyper rescue-shield,” a statement said.

The stakes have been raised further by the prospect of Eurosceptic parties prevailing in Dutch elections tomorrow. The outcome is far from certain, with analysts predicting an eventual coalition government. A growing tone of scepticism in Holland, a key creditor nation within the Eurozone, could further constrain options to try to deal with the crisis.

When the ball is in the court of Europe’s politicians, all bets are off: uncertainty remains the only game in town.