German president tells Angela Merkel to come clean on EU debt deal
GERMAN president Joachim Gauck has ordered Chancellor Angela Merkel to clarify exactly what she agreed behind closed doors at the EU crisis summit ten days ago, lending a powerful voice to critics dismayed by the surging costs of euro bail-outs.
"She has a duty to explain in great detail what it means, and what it means fiscally. There seems to be a lack of energy in telling the people what is really happening," he told ZDF television.
President Gauck's broadside came as markets wait anxiously for a crucial hearing this Tuesday by Germany's constitutional court on the legality of the European Stability Mechanism (ESM), the EU's €500bn bail-out fund. A clear ruling against the ESM would throw into doubt Germany's ability to backstop the euro and risk a dramatic escalation of the debt crisis.
Legal challenges to the ESM have been filed by a range of private citizens and lawmakers, mostly arguing that the fund violates the Bundestag's sovereign control over budgets, and eviscerates democracy. Mr Gauck will not sign the ESM into law until the court has ruled, probably later this month.
There is deep confusion over the summit deal after Mrs Merkel claimed that it "changed nothing" and that the small print made in it clear that there would be "no further liabilities".
Mrs Merkel's attempt to row back from the accord has undercut efforts of the French, Italian, and Spanish leaders to claim a major breakthrough - chiefly moves towards an EU "banking union" and green light for bond rescues on easier terms. Yields on Spanish 10-year bonds punched back up to crisis levels of nearly 6.9pc on Friday as post-summit optimism drained away.
Eurozone finance ministers will meet on Monday to flesh out details on use of the ESM to backstop sovereign debt. The summit deal tweaked the terms of any ESM bond purchases, allowing states to tap the fund without facing a harsh "Troika regime" provided they comply with EU fiscal rules.
However, it remains unclear whether the fund has the firepower to defend the system since Germany refused to grant the ESM a banking licence enabling it to borrow from the European Central Bank.
Ignazio Visco, the Bank of Italy's governor, said over the weekend that the ESM's resources were "insufficient" to tackle the crisis. He warned that monetary union had become deeply dysfunctional, with booming Germany able to borrow four times more cheaply than prostrate Italy. "This is creating a serious centrifugal force in the eurozone," he told Corriere Della Sera.
Mr Visco said most of 470 basis point spread in Italian 10-year debt over German Bunds has nothing to do with errors by Italy itself. He expects Italy's economy to contract by 2pc this year.
Chancellor Merkel has finessed the EMU crisis over the last two years behind a screen of calculated ambiguity, hinting at fiscal union at EU summits while insisting later that there had been no actual move towards joint liability.
Critics say this strategy has run its course. The crisis is nearing the point where Germany must either cross the Rubicon towards shared budgets and debts or make clear that it will go no further to save the euro.
Anti-euro protest within Germany is becoming louder as potential costs escalate, with Bundesbank "loans" to other EMU central banks under the `Target2' payments system reaching €729bn in June.
A group of 170 economists from the "German-speaking" zone published a joint letter last week warning that an EU banking union would pool bank debts worth three times total sovereign debt -- €23 trillion by some estimates - and expose northern creditor states to ruinous liabilities.
They said such a move would lead to bitter discord between countries and ultimately poison the European Project. The group called for the losses to be imposed on banks and creditors, claiming the EU's current bail-out policies amount to a rescue for "Wall Street and the City of London".
Pro bail-out economists in Germany said such arguments are reckless and echo the sort of "liquidationist" thinking that allowed the US and Central European banking systems to collapse in 1931, with dire consequences.