21st Feb 2019

Germany to delay eurozone bail-out fund

  • The court in Karlsruhe may delay the planned bail-out fund calendar (Photo: Al Fed)

The 9 July start for the eurozone's €500bn strong bail-out fund is set to be delayed by a few weeks as Germany waits for a ruling by its highest court.

German President Joachim Gauck on Thursday (21 June) said he would accept a request by the Constitutional Court to postpone the signature of the legal acts needed for the European Stability Mechanism to come into force, pending a ruling on their constitutionality.

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Earlier that day, the German government reached an agreement with the opposition to pass the ESM and the fiscal discipline treaties on 29 June - bundled together in one legislative package. But the left-wing Linke party has announced it will lodge a complaint with the Constitutional Court immediately after ratification.

A spokeswoman for the Karlsruhe-based court said they would ask the president to postpone signing off the laws until the judges reach a verdict. This could take a few weeks, provided the claim is accepted.

"The president intends to accept this demand, in line with usual practice among the state institutions and out of respect for the Constitutional Court, as soon as the Bundestag and the Bundesrat have ratified the respective treaty laws," the president's office said in a statement.

The ESM is a permanent structure to be set up in Luxembourg. It will take over most of the staff from the temporary European Financial Stability Facility. The EFSF is a €440bn fund consisting of loan guarantees from 14 eurozone countries, half of which has been used to borrow money for Portugal, Ireland, and more recently for the second Greek bail-out.

The envisaged €100bn bail-out for the Spanish banking sector could still come out of the EFSF. But it would be insufficient to prop up Italy if Rome should ask for bond-purchasing assistance aimed at lowering its soaring borrowing costs.

On his way into a meeting of eurozone finance ministers in Luxembourg, set also to discuss the ESM ratification process, a visibly irritated German finance minister Wolfgang Schauble said: "I don't think it is smart when constitutional bodies are communicating publicly among each other."

Even if markets are currently not paying attention to the intricacies of German politics, the news that Berlin is delaying the process "is contributing to uncertainty, especially for Italy," ING economist Carsten Brzeski told this website.

"Meanwhile, everybody secretly hopes for the European Central Bank to intervene with more liquidity or buying bonds," he added, in reference to the €1 trillion in cheap loans injected earlier this year and the bond purchases carried out in 2011 which brought down Italian and Spanish borrowing costs.

Italian hassle

On the other hand, Italy's own messy politics may complicate the ESM calendar, even though it is in Rome's interest for it to enter into force. The technocrat government of Mario Monti is at the mercy of former Prime Minister Silvio Berlusconi, who is now toying with the idea of toppling the government and is arguing that a euro-exit for Italy is "no blasphemy."

Italy's EU affairs minister earlier this week said the parliament still had time to ratify the ESM treaty before summer recess, but also added that the 9 July deadline was not set in stone.

"July 9 is an indicative date. The date of the ratification depends on the Parliament and on its autonomous decision-making. We, as a government, are obviously pushing for a quick ratification," he said.

For the ESM to come into force, it needs the approval of member countries representing 90 percent of its capital. Both Germany and Italy alone can delay the process, as they each contribute more than ten percent of the capital.

Legal challenges may delay eurozone bail-out fund

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.

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