Caught in the Euro Trap Internal Opposition Grows to Further Bailout Measures

Angela Merkel can't win when it comes to the euro bailout. Leaders of her own government coalition in parliament openly oppose new measures that could create additional liability for German taxpayers. The chancellor is expected to offer concessions in Brussels, but they could haunt her in state elections.

Euro rescuers Angela Merkel and Wolfgang Schäuble: A convoluted compromise

Euro rescuers Angela Merkel and Wolfgang Schäuble: A convoluted compromise

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It turned out to be a decision that was entirely to Free Democratic Party (FDP) leader Guido Westerwelle's taste. The coalition lawmakers of the center-right Christian Democratic Union (CDU) along with its Bavarian sister party the Christian Social Union (CSU) and the business-friendly FDP have jointly managed to clip the wings of overly generous rescuers of the euro. According to a resolution recently passed by both parliamentary groups, Germany's federal parliament, the Bundestag, expects that the use of funds from healthy euro-zone countries to purchase government bonds from ailing member states "will be ruled out."

The German deputy chancellor experienced emotions ranging from satisfaction to a sense of triumph. "Our demands have been made perfectly clear," Westerwelle enthusiastically told members of the FDP parliamentary group. He said that, thanks to pressure from his party, the coalition was demonstrating that it was careful with taxpayers' money.

Although the resolution was approved by a clear majority of both parliamentary groups in the coalition, the document is no proof of unity -- quite the contrary. The origins and outcome of this paper reveal how deeply divided the government camp is over what to do next about the euro. Coalition lawmakers are at odds with the government, the CDU is locking horns with the FDP and the CSU, and CDU and CSU ministers are at loggerheads with FDP department heads.

German Chancellor Angela Merkel (CDU) finds herself caught between the lines of these fronts as she gears up to negotiate on the future of the euro on two occasions in Brussels this month. She was only barely able to prevent the coalition lawmakers' parliamentary resolution from making even more stringent demands. The parliamentarians originally intended to categorically reject the idea that the euro rescue fund, the European Financial Stability Facility (EFSF), or its long-term successor, could purchase government bonds from heavily indebted euro-zone countries.

A Potentially Explosive Issue for State Elections

It wasn't until Merkel spoke with CDU parliamentary floor leader Volker Kauder that the resolution's language was toned down. Now the Bundestag is no longer demanding a ban on purchases, as originally planned, but only "expects" such a ban.

This seemingly minor amendment could prove to be an explosive issue in upcoming state elections. Coalition members of parliament intend to send a clear signal to voters: no new burdens on taxpayers for the euro. Top government officials know, though, that this is exactly what will come out of the negotiations in Brussels. The coalition is caught in the euro trap once again.

Yet it all began quite harmlessly. In early February, a number of conservative parliamentarians, with help from the CDU-led Finance Ministry, wrote a draft proposal for a parliamentary resolution that did not even mention -- and thus did not exclude -- purchasing programs for government bonds. The contentious passage was only added at the insistence of the FDP and CSU, which have been trying to outdo each other's euroskepticism for some time now.

The chancellor was not particularly pleased. She refuses to allow herself to be too constrained when she enters into negotiations in Brussels. It is simply not acceptable, she told Kauder, for the Bundestag to determine what decisions will be made by the heads of state and government.

Merkel and her finance minister, Wolfgang Schäuble (CDU), also oppose the notion of the rescue fund purchasing government bonds. However they have no objections to troubled euro-zone countries using loans from the rescue fund to make such purchases on their own. At least this way these countries can partially rid themselves of debt. Because the government bonds of debt-ridden countries would be repurchased far below their face value, private creditors would also be liable for losses incurred during the buybacks, fulfilling a key demand that Merkel has been pushing for.

A Convoluted Compromise

The convoluted compromise that German lawmakers eventually reached could have fatal consequences for the government camp. After all, the wording of the resolution allows room for interpretation -- something which has always fueled disputes in the current governing coalition.

Finance Minister Schäuble certainly does not feel bound by the parliamentary resolution. Sources close to the minister say that he doesn't see it as a "legally binding guideline." After all, they suggested, the motion passed by the ruling coalition only refers to expectations, so it only stands to reason that the Bundestag could also end up being disappointed.

Influential coalition lawmakers take a very different view. They insist that the rescue fund is not allowed to directly purchase government bonds, nor grant loans to other countries so they can buy back their own bonds. These legislators also say that the rescue fund is barred from purchasing government bonds from Greece, Portugal and Ireland that the European Central Bank (ECB) acquired during its bond-buying program.

The volume of those state bonds purchased by the ECB has ballooned to over €77 billion ($108 billion). In internal discussions with government representatives, ECB President Jean-Claude Trichet has spearheaded calls from bank officials for euro-zone member states to relieve the financial institution of this burden.

The central bankers see the bailout purchases as a cardinal sin, and they want to wash their hands of it. But so far the member states have expressed little enthusiasm for the idea. Nonetheless, coalition lawmakers intend to use their resolution to head off this possibility as well.

"We have made it clear that we reject any kind of buying program for government bonds," says Michael Meister, deputy chairman of the joint CDU and CSU party group in parliament. In his opinion, there is absolutely no room for interpretation. Meister also argues that the implementation of any deal would still require the approval of both Germany's federal parliament, the Bundestag, as well as the Bundesrat, the upper legislative chamber that represents the states and also has the right of co-determination on many important issues. Merkel's coalition government does not currently hold a majority in the Bundesrat. "The federal government would be well advised not to disappoint us too much," he said. Michael Fuchs, likewise a deputy chair of the conservatives' parliamentary group, has also expressed his opposition to such bond-buying programs. He warned that Greece cannot become the model for how European countries can "inexpensively dispose of part of their debt."

FDP finance expert Hermann Otto Solms says that he is also "strictly opposed to allowing the rescue fund to provide loans to indebted nations to buy back their government bonds." He argues that it is questionable whether such actions could be reconciled with Germany's constitution. "What is being proposed here is nothing other than a transfer union through the back door," Solms says.

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Trojan Horace 03/07/2011
1. Caught in the Euro Trap
First of all at the risk of stating the blatantly obvious - the Euro is Germany's currency - there's no going back from that - so Germany is heavily invested in its success - but China and Japan have been queuing up to buy Euro bonds... The notion that this is Germany's problem alone is mistaken. America has a far bigger problem - 14 trillion of them. The desire of everyone and their mothers to escape from the dollar and get into a more stable currency is tangible. The Euro has grown in stature and power - and even a Spanish banking meltdown is a perfectly manageable crisis assuming it ever even materializes. Germany has in my view taken a perfectly viable position- we support German interests and as far as we can afford to - the Euro.
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