Merkel breaks German law on ESM rescue
Angela and Wolfgang – still not making friends
You can see why Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble are back-pedalling so frantically over the EU summit deal.
While Mrs Merkel seemingly agreed to let the European Stability Mechanism (bail-out fund) rescue banks directly – starting with Spain – she did not have the authority from the Bundestag to do so.
Indeed, she violated a categorical prohibition by the budget committee or Haushaltsausschuss.
Here is the wording of Amendment 2 to the finance law or Finanzierungsgesetz on the 26th June, the day before the Brussels summit, sent to me by a very well-informed German reader.
Finanzhilfen zur Rekapitalisierung von Finanzinstituten einer Vertragspartei schliessen Finanzhilfen an eine Einrichtung zur Stabilisierung des Finanzsektors MIT ein, wenn die sektorspezifische Konditionalität gewährleistet ist, keine direkten Bankrisiken übernommen werden und die Rückzahlung durch eine Garantie der Vertragspartei gesichert ist.
It states that the ESM may not be used to recapitalise banks directly. Any such loans must guaranteed by the signatory to the treaty, ie the sovereign state, piling up further public debt.
Chancellor Merkel is wading into deep waters here. The constitutional court ruled last September that the government must obtain prior approval from the Bundestag before committing to further bail-outs – at least that is how I understood it, as did the key committees in parliament (German readers will correct me if I am wrong).
She has basically overstepped her authority.
Yes, she was under massive pressure from the Latin Bloc, Washington, Beijing, and the IMF to do so. One can certainly sympathise.
In my view, direct bank recapitalisation is indeed a crucial step that must be taken to break the diabolic nexus between banks and sovereigns – each dragging the other down – if Europe’s leaders wish to hold the euro together and save their project. (Not my wish particularly, since I think the best solution would be for Germany and its satellites to leave EMU. But if your aim is to save monetary union, then damn well save it).
However, leaders get into great trouble when they trifle with parliaments. That is why Mr Schäuble was arguing on Tuesday that there had been no summit agreement on this issue, contradicting a categorical assertion by the European Commission.
What is an bond investor in China, Japan, the US, Canada, or Abu Dhabi supposed to make of this interminable shambles?