Sunday

14th Aug 2022

Merkel under pressure over summit deal

  • The Bundestag is due to vote on the treaty establishing the permanent bailout fund (ESM) at 5pm Berlin time (Photo: consilium.europa.eu)

German Chancellor Angela Merkel's decision to help Italy and Spain by easing up the rules on the use of the bailout funds is already having a direct political fallout at home.

The opposition Social Democrats have called a special meeting of the Bundestag's budget committee to discuss the late night deal in Brussels to allow the bailout fund to directly fund banks and eventually buy up government debt.

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Carsten Schneider, head of the budget committee, said the Chancellor needed to explain her "180 degree u-turn." On Twitter, he indicated the agreement would lead to moral hazard. The deal means "all obligations on a country are now only paper tigers."

Meanwhile German newspapers are portraying the outcome as a victory for Italy's Mario Monti - who came into the summit saying this was the minimum he needed to be politically credible back in Italy - at the expense of Merkel.

"The night in which Merkel lost," says a leading article on Spiegel Online. A comment piece in the country's foremost centre-right daily, the Frankfurter Allgemeine Zeitung, is titled "The debt union is getting closer."

Merkel, who struggles to balance the wishes of a restive parliament and the needs of struggling euro countries have shaped the single currency's response to the crisis over the past two years - was already keen to stress the conditionality within the deal.

Returning to the summit on Friday morning, she said if Spain or Italy wanted to have the eurozone bailout fund buy their government debt - they would have to agree to a reform programme, as well as supervision by European Commission, European Central Bank, and International Monetary Fund officials - known as the troika.

Meanwhile, bank getting directly recapitalised by the funds will also be a multi-step, condition-filled process.

"As such we are staying fully within the scheme we have had until now. We stayed true to our principle of 'no payment without guarantee'," said the chancellor.

The Bundestag is due to vote on the treaty establishing the permanent bailout fund (ESM) at 5pm Berlin time. It will vote on the treaty in its current form.

Berlin officials were saying on Friday that two more votes will be needed further down the line to establish a eurozone-wide bank supervisory authority and on allowing the ESM to directly recapitalise banks.

But the vote is not the final step in establishing the ESM on 9 July, as initially planned. The leftist Linke party has promised to lodge a constitutional challenge on Saturday, with the German president already having indicated he will wait with signing the ESM law until the Karlsruhe-based court gives its verdict. This may take a few more weeks.

Eurozone officials have however prepared for that scenario, with the Spanish bank bailout of up to €100 billion to be paid by the existing, temporary bailout fund (EFSF) and taken over by the ESM when it comes into being.

Analysis

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