Since it has emerged after the G-20 meeting that the euro area's political leadership is seriously considering leveraging the EFSF via the ECB or some other mechanism (frankly, the ECB seems the most likely choice), the usual cacophony of squabbling, affirmations and denials has begun to emanate from Europe.
In Germany, arguably the lynchpin to any such plans, the debate has become more rancorous, as politicians on all sides seek to gain advantage from the government's perceived mishandling of the crisis, with even the chairman of the constitutional court, Andreas Vosskuhle (correctly spelled: Voßkuhle) now weighing in. In particular, several members of the sinking ship, the FDP, are saying that they will not vote for ratification of the July agreement unless they are credibly assured that no EFSF leveraging will occur. Vosskuhle meanwhile opines that if Germany is planning to cede more of its fiscal sovereignty to Europe, then it must amend its constitution – a clear signal that the court will no longer just rubber-stamp the government's bailout escapades. Vosskuhle even insists that it will not be enough to alter the constitution via an act of parliament: instead, he demands a referendum. This is bad news for the eurocrats, as a referendum will without a doubt prove a lost cause for them.
Note in this context that when Angela Merkel was asked in her otherwise quite successful television interview over the weekend whether she would (paraphrasing) 'pursue the European idea even if Germany's populace no longer supported it', she gave a quite peculiar answer – essentially it boiled down to 'yes, she would, as Germany profits immensely from European integration even if the people are at present blind to this fact'.
It seems Vosskuhle's remarks are intended as a reminder that this attitude won't fly in Karlsruhe. A summary of the situation can be read at the Telegraph. Here is a pertinent snip:
“The accusation that German leaders are conspiring with EU officials to emasculate the Bundestag is highly sensitive, going to the core of the raging debate in recent months over EU encroachments on German democracy.
Dr. Vosskuhle said that the improvisation of far-reaching policies had become "dangerous", and warned against schemes to circumvent the rule of law with backroom deals. "Germany has a great affinity for the rule of law. People expect the political class to obey the rules." He reminded leaders that the court had set clear boundaries to EU bail-outs in a ruling earlier this month, although it gave the go-ahead for the package of measures agreed so far.
"Our judgment makes clear that the Bundestag cannot abdicate its fiscal responsibilities to other actors. And no permanent mechanism may be created that entails taking over the liabilities of other states," he said. When asked whether eurobonds are off limits, Dr Vosskuhle said any ruling by the judges would be "pretty clear".
Ewald Nowotny, Austria's central bank governor, said it would be a grave error for Europe to try to bounce Germany into decision of huge scope and significance without the assent of the people. "It is quite dangerous when a feeling builds up in Germany that the country is being overrun, and specifically, that such an important country is being outvoted in the ECB," he told Der Standard.
There is little doubt that Chancellor Merkel can pass the EFSF bill with the help of the Social Democrats and Greens. It is less clear whether she can survive the vote without an absolute majority from her own coalition. Green leader Jurgen Trittin said her government would be "finished" if it has to rely on opposition votes. Her task has become that much harder after Standard & Poor's hinted Germany itself might loose its AAA rating if the rescue machinery is greatly expanded.
"There is no cheap, risk-free leveraging option for the EFSF any more," said David Beers, S&P's head of sovereign ratings. "We're getting to a point where the guarantee approach .. is running out of road," he said, adding the various options under discussion could have "potential credit implications". The Social Democrats are using their political leverage over the EFSF vote to push for greater "haircuts" for banks holding Greek debt. This creates a fresh set of dangers.”
(emphasis added)
Elsewhere, the Telegraph reports on the impending split in Germany's ruling coalition as a result of the latest EFSF plans:
“Confirmation of the talks, however, sparked outrage in Germany, where opposition politicians threatened to derail the plans by voting against a key amendment to the bail-out fund this Thursday.” […]
“On Thursday, the German parliament is expected to vote through reforms to the EFSF agreed on July 21 to make it more flexible. However, the latest revelations have redoubled opposition efforts.
Social Democrat Carsten Schneider said the government should come clean on its "real intentions" and that "the parliament and public are having the wool pulled over their eyes".
Of course Mr. Schneider's own party would not hesitate for one second to 'pull the wool over the public's eyes' if it were in power. Alas, there is now not only the danger that Mrs. Merkel may lose the support of her own coalition partner, she may even lose the support of the opposition in terms of approval for the EFSF. One thing is clear: if she can not get a majority of her own coalition to vote in favor, her government will fall and new elections will have to be called.
Adding to the sense that there is no clear line in terms of how the EFSF may be abused in the future to create some European version of 'TARP' or 'TALF', Austria's representative to the ECB board, Ewald Novotny, confirmed that an increase of the EFSF's firepower was being discussed, while concurrently, both Wolgang Schäuble and Spain's minister of finance Elena Salgado came out to cast further doubts on the plan, respectively to even deny that there were any such plan being considered.
Novotny:
“We are just now discussing an extension of this EFSF," European Central Bank Governing Council member Ewald Nowotny said at Harvard University in Cambridge, Massachusetts.
"It is something more than it is now" but "might not be a trillion (euros)," Nowotny said. Markets chatter recently has suggested the fund could be increased to as much as 2 trillion euros from the current 440 billion euros.
Still, in Berlin earlier, Germany's Finance Minister Wolfgang Schaeuble cast doubt on any plan to top up the EFSF.
In his remarks at Harvard Novotny did not repeat comments made earlier on Monday in an interview with Market News International, that ECB rate cuts should not be ruled out. "The ECB never pre-commits, and rate cuts can not be excluded," Nowotny, who also heads the Austrian National Bank, told MNI, adding that the ECB could further downgrade its European grown forecasts.
(emphasis added)
Schäuble:
“German Finance Minister Wolfgang Schaeuble has rejected reports that the European Union and the International Monetary Fund (IMF) are working on plans to boost the size of the euro zone's financial rescue fund to support a partial debt default by Greece.
The German government is working together with its European partners to create the conditions for efficient use of the European Financial Stability Facility (EFSF), "but we have no intention to further replenish it," he said in a TV interview on Monday evening.
He made those remarks after reports from the weekend meting of the IMF and the World Bank in Washington of a possible increase in the size of the EFSF to around 2 trillion euros from the present level of 780 billion euros caused new tension in Chancellor Angela Merkel's increasingly shaky coalition.
Merkel's junior coalition partner, the Free Democratic Party (FDP), threatened to bring down the government by denying it their votes in a crucial parliamentary vote on the euro zone bailout fund on Thursday if any changes are planned.”
(emphasis added)
From this is not quite clear whether Schäuble merely intends to calm his junior partners in the coalition or if he has really declared the plan DOA.
Spain's Salgado:
“An extension of the European Financial Stability Facility to 2 trillion euros ($2.7 trillion) as speculated about by markets is not on the table, Spanish Economy Minister Elena Salgado said on Tuesday. "It is not on the table, nor has it been discussed," she said in an interview on Spanish television.”
(emphasis added)
In other words, things are once again clear as mud in euro-land. You really couldn't make this up. As always happens when the social mood darkens and a major economic contraction accompanied by a secular bear market in stocks is underway, harmony and cooperation are giving way to discord and hostility. Since the current downturn is one of major degree – an attempt to correct the excesses piled up after four decades of an unprecedented global experiment in employing fiat money – we suspect that both the end of the euro and the end of the EU such as it is now constituted are probably not too far away. There may be a final push to try and hold things together, but the writing is clearly on the wall.
