Can Germany heal the rest?

The rejection by Germany's Constitutional Court of three appeals against the legality of Germany's participation in previous European Union bailouts of debt-stricken member countries has been taken by world financial markets as a sign of progress towards resolving the region's debt and banking crisis.

Prior to the ruling, leading analysts were increasingly taking the position that Europe is inexorably heading towards a crisis that would lead to the death of the common currency and European integration.

Indeed, German Chancellor Angela Merkel is reported to have said that "if the euro collapses so does Europe".

The court's decision has, in effect, cleared potential blocks to German participation in future bailouts in other Eurozone countries, although it has specified that such bailouts must still be approved by the Budget Committee of the German Parliament.

This means that while the decision should lend increased legitimacy to initiatives to shore up the European currency, some uncertainty will remain because of the need to secure parliamentary approval.

We may see less volatility in the markets, but investors are likely to be cautious about the resolution of the financial problems in Europe.

In particular, there is scepticism as to whether Eurozone member countries will authorise increased resources for the European Financial Stability Facility which has been designated to take over the management of the rescue fund from the European Central Bank. Already, more than half of the €440 billion pledged has been committed to Greece, Ireland and Portugal, but the larger scale of interventions in Spain and Italy are yet to be determined.

Moreover, some member countries have been demanding that in return for bailout funds debtor countries must pledge collateral, and these demands are seen as impractical.

More important, there is the fundamental issue of the lack of strong central coordination of the Eurozone's debt and spending policies, and whether the 17-nation currency union can survive without the underpinning of a centralised fiscal system.

Critics of the European common currency had identified this as a major flaw from the birth of the euro and it had weighed on the value of the currency in the early years.

But as the euro strengthened in recent years, underpinned by the robust German economy and strong economic growth across the Eurozone,w the concern was muted.

Serious roadblocks have always existed in the way of a closer European fiscal relationship because of the opposition in most countries to the ceding of national control over fiscal policies. Like other fundamental areas where national decision making is being compromised, constitutional amendments are required and these have to be approved by referenda.

The history of past referenda is mixed and the political landscape across Europe is not favourable at this time.

In the prevailing austere economic situation, electorates are not likely to support moves towards a fiscal union as in the stronger countries they would be interpreted as permission to underwrite the fiscal looseness of the debt-ridden members.

Elections are due in France next year and in Germany in two years, in a context where both German and French taxpayers are fiercely opposed to their taxes being used to bail out other countries.

Binding rules

The issuing of so-called Eurobonds, which is seen as the most viable solution to the debt and banking crisis, would require some binding rules on fiscal matters.

Political leaders have been ruling it out and German opposition to this approach is particularly strong with Mrs Merkel insisting that "Eurobonds are the way to a union of debtors", and, therefore, that it is "the wrong answer".

To the extent that these issues remain unsettled financial markets will continue to punish European banks that are heavily exposed to the debt-ridden countries, and this will fuel further losses in stock markets and bear down on the overall economic situation, especially in Europe and the US but also globally.

business@gleanerjm.com