WILL last week’s summit of EU leaders, the nineteenth since the start of the Eurozone crisis, be seen by future historians as the point at which the tide finally turned? This was certainly the tone of some of the initial media reactions, which judged that Angela Merkel’s resistance had finally been breached, and that progress had finally been made. The markets responded with their traditional post-summit bounce.
But how much has really changed? Merkel certainly took a beating, after being ganged up on by France, Italy and Spain. She gave way on a couple of short-term issues – by allowing the Eurozone’s permanent bailout fund, the European Stability Mechanism (ESM), to directly recapitalise Spain’s banks, and on allowing the purchase of government bonds on more favourable conditions than those imposed on existing beneficiaries of bailouts. Allowing the ESM to recapitalise banks could make a difference if put into practice, but the other move merely activates an existing EU decision. So nothing new.
In any case, these measures face significant political and economic hurdles. They may also be overtaken by events, like last year’s non-agreement to leverage the Eurozone’s temporary bailout fund, the European Financial Stability Facility, to a maximum value of €1 trillion (£807bn). According to reports out of Finland, the crucial issue of debt seniority – and whether private creditors should take losses before taxpayer-backed institutions – is still subject to negotiation, along with whether creditor countries should be getting collateral in return for loans to Spanish banks. These are thorny issues.
More significantly, Germany is still vetoing any movement on longer-term debt pooling, such as via Eurobonds, in the absence of cast-iron guarantees of fiscal discipline and oversight in the Eurozone – itself difficult to achieve. After the summit, Merkel insisted that “we remain wholeheartedly committed to our current formula: benefits, consideration, control and conditionality.” But this was not enough to prevent a wave of discontent back home, with Die Welt capturing the mood with its headline “the floodgates open”.
With each successive summit, Merkel is running out of room for manoeuvre across a range of fronts. Economically, the German economy is resilient but it cannot remain immune to the worsening crisis forever. Politically, her latest concessions are only likely to feed the restless mood of many of her backbenchers and natural allies in the German business community. Finally, on the legal front, the limits of the current constitution have been stretched almost to the limit, and any full debt-pooling, which would involve transferring sovereign financial rights to Brussels, would require a referendum.
This latest episode has left Germany seriously frustrated and with a feeling of an ever-increasing weight on its shoulders. This may only harden German resistance to putting even more of its money on the table.
Pawel Swidlicki is a research analyst at Open Europe.