German politics binds Merkel’s hands: Zoellick

Robert Zoellick, who successfully completed his tenure as World Bank president last month, says the euro zone has entered "a very fragile period" and Chancellor Angela Merkel's freedom for manoeuvre is shrinking as the German constitutional court has stepped in to scrutinise closely the expansion of various funding mechanisms to stabilise the euro zone.

Speaking exclusively to FE, Zoellick said he had serious worries on the political economy now as the German people were increasingly getting frustrated at the manner in which Germany is being criticised for not doing enough to stabilise the euro zone even though they feel a lot has been done. This could result in further political problems in the way Germany looks at expanding the bailout mechanisms to bigger euro nations like Italy and Spain. Zoellick was in Mumbai to give a talk at the first Oberoi-IISS Discussion Forum. The forum, launched by the International Institute for Strategic Studies (IISS) and the Oberoi Group, aims to inspire intelligent public debate on matters of international importance from an international perspective.

"I am not sure that the political situation in Germany and the constitutional court scrutinising things very closely will help in fast decision-making," Zoellick said. "In my view the big decisions taken in the last European leaders' summit to take quick, coordinated action to save ailing banks, etc, are not being implemented fast enough."

For instance, the German constitutional court has postponed the setting up of the European Stability Mechanism, which was to have been announced early July, to September now. He said this shows political brinkmanship, which is not good for the euro zone.

History tells us that such brinkmanship can lead to serious miscalculation and things can then spin out of control and we could face another Lehman moment, he added.

Zoellick said the one silver lining that has raised the hopes of the global markets is the European Central Bank president Mario Draghi's statement last week that it has the mandate to intervene to stabilise monetary policy. Though the ECB cannot bail out individual governments, it does has the mandate to stabilise monetary policy automatically by pumping in more liquidity so that the bond spreads of some countries do not go out of whack.

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