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Is Germany Damned to Euro Solidarity?

Germany is exploring bailout options if weaker euro zone countries plunge into bankruptcy. Commentators at German papers say the country has no choice but to help if worse comes to worst. Most add that such scenarios are a long way off.

Increasingly, European governments fear that staggering financial problems in euro zone countries like Italy, Ireland and Greece could threaten the stability of the EU's monetary union. Now Germany, Europe's strongest economy, is preparing for the possibility that it might have to provide financial aid to euro zone member states if they plunge towards bankruptcy.

There are a number of options on the table so far. One of those would be allowing economically stable countries to issue bilateral bonds on behalf of states in need. Another is the issuing of Eurobonds that would be underwritten by several EU members. Germany's Finance Ministry is also researching the possibility of bailout measures that could be organized by the European Commission in Brussels.

The Maastricht Treaty establishing the euro explicitly prohibits euro zone member states from bailing out insolvent neighbors -- and many officials support this provision, arguing that irresponsible states might abandon any fiscal responsibility if they knew others would rescue them in an emergency.

In Germany, Finance Minister Peer Steinbrück said this week that if euro zone member states faced bankruptcy, other countries within the common currency area would have to step in to help them. And his staff believe there are provisions in EU treaties that would make such bailouts legally permissable.

German commentators on Friday warn that if countries fail to act, it could result in the collapse of the euro. At the same time, they say intervention could also trigger rampant inflation throughout the EU.

The center-right Frankfurter Allgemeine Zeitung writes:

"The crisis has relentlessly exposed the weaknesses of Europe's monetary union. Small countries on the edge of the EU have lived beyond their means and failed to get their welfare systems and national budgets in order in time. Under the cover of a unified currency, they continued with their same bad habits. So it's natural that investors are now demanding higher risk premiums from these weakened countries when they borrow money by issuing bonds. These countries may soon be faced with the choice of either forfeiting their deficit policies or giving up the euro. The apparently comfortable option of falling back on Germany won't bring about a rescue -- it would instead result in rapid inflation for everyone. And if Germany, as Europe's most reliable bond issuer, loses the trust of its investers, the euro will collapse, too. That's why the promised community of stability cannot become a union of unlimited liabilities."

The Financial Times Deutschland writes:

"A signal from Steinbrück that Germany has the political will to step in and help its European neighbors if needed is a step in the right direction. Right now, we haven't come to a point yet where we need to worry about the currency union collapsing or even that Greece or Ireland will go bankrupt. But their refinancing problems have become so bad in recent weeks that market participants have begun to speculate about the possibility. When a comparably liquid neighbor like Germany ensures that it will not allow euro zone countries to fail, that can do a lot to help quiet speculation."

"Clearer announcements on how Berlin or Brussels could help weaker euro zone members would be even more effective. After all, it is clear even to the markets that Steinbrück can't simply tell German taxpayers that they must pay off Ireland's debts, even if it were allowed under Maastricht. ... Steinbrück would do well to clearly communicate concrete instruments that can be used instead of casually making commitments that are enormously broad and would hardly be possible to maintain in an emergency."

"Such instruments exist. For example, the EU could use the European Investment Bank to set up an emergency fund that could provide liquidity to member states unable to make their payments. Countries like Germany could also purchase bonds from these countries and provide them with loans before they face the threat of collapse. Solidarity is honorable. But it only becomes sustainable and credible if it is backed by realistic plans."

The financial daily Handelsblatt writes:

"Steinbrück cannot risk the collapse of Europe's monetary union because the consequences for Germany's economy would be dramatic. Unfortunately, Steinbrück is first going to become aware of the fact that he is damned to solidarity with the weaker euro countries as a result of this crisis. The currency union is unprepared for it. The euro zone members failed to take advantage of the first 10 years of the currency to create aid mechanisms that could be used in an emergency. Germany is the country most responsible for this failure. Berlin simply avoided the issue because it wanted to protect Germany's coffers from weaker euro zone countries. But there are entirely intelligent ways of providing aid to to these nations without placing too much of a burden on taxpayers, including the Eurobonds that Steinbrück has snubbed his nose at."

"For its part, the European Commission has only one available option: Article 119 of the EU Treaty allows that the Brussels administration to take loans on capital markets on behalf of member states that are having trouble making payments. This aid, however, is limited to €25 billion. Ten billion euros of that amount has already been given to Hungary and Latvia."

"The Central European Bank (ECB) could also provide short-term aid. It would be theoretically possible for the ECB to buy up government bonds in order to help troubled countries. But the ECB is understandably hesitant. This solution would force it to start printing money, which would result in incalculable intermediate consequences for the value of the euro. Besides, the ECB's independence would abe called into question if were to encourage the creation of additional state deficits."

-- Caroline Winter, 4 p.m. CET