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23rd Sep 2021

Legal challenges may delay eurozone bail-out fund

  • 'I am all for more Europe, just not one determined by political elites' (Photo: Cocoabiscuit)

Legal challenges in Germany, Ireland and Estonia, as well as political uncertainty in the Netherlands, may delay the setting up of a permanent eurozone bail-out fund at a time when Spain's economic woes require a strong firewall.

Citing democratic concerns, an Irish MP on Tuesday (17 April) lodged a constitutional complaint against the European treaties establishing the permanent eurozone bail-out fund - the European Stability Mechanism (ESM) - and the 'fiscal compact' on budget discipline required by Germany to agree to future bail-outs.

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A similar complaint was lodged last month by the Estonian ombudsman, who questioned the 'emergency voting procedure' allowing big member states to take decisions even if smaller euro states object.

But even if Ireland and Estonia were to postpone ratification of the ESM treaty, the €500 billion strong bail-out fund could in theory still come into force on 1 July as planned, as the two countries contribute with less than 10 percent of the total capital - the threshold above which the ESM would be derailed.

However, if the German constitutional court accepts a legal challenge being prepared by the former justice minister - the calendar may still have to be re-drawn. Herta Daubler-Gmelin, justice minister in the first cabinet of Gerhard Schroeder said the ESM bailout fund “crossed a red line” and undermined the competences of national parliament to decide on national budgets.

“I’m convinced we will have a good chance with our case. I am all for more Europe, just not one determined by political elites,” she said Friday. Two other challenges are likely in Germany, from the Left Party and from a Bavarian MP who already challenged two EU treaties.

The Netherlands, which represents 5.7 percent of the ESM capital, is steering in troubled political waters, as the minority government has to count on the increasingly reluctant Social-Democratic opposition to back the two treaties in parliament.

EU officials in Brussels meanwhile are worried that Spain's raising borrowing costs are already a signal that markets have again started to lose confidence in the eurozone's ability to get its house in order. "The summer will be hot and it will start early," one source told this website.

Ten-year borrowing costs for Spain rose above six percent on Monday - for the first time since the European Central Bank started pumping €1 trillion worth of cheap loans into eurozone banks in November.

"In the current market discussions on Spain, it would be crucial to have the ESM as soon as possible," Carsten Brzeski, chief economist at ING told this website. He said a full-blown bail-out for Spain - which would eat up almost all ESM resources - is unlikely, but "bail-out light" recapitalising Spain's troubled banks "will happen."

As for the legal challenges and the political troubles, Brzeski said that "all depends on Karlsruhe" where the German Constitutional Court sits.

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