If Berlin shrugs

The real worry is that Germany may not be able to hold up the eurozone

The outcome of the Greek elections last week gave some hope that Europe may avert another global meltdown, with the majority in Greece wanting to stay with the euro. However, what really needs to be watched carefully is how the German parliament responds to fresh clamour by European heads of state for establishing new funds to deal with Spain-type banking crises across the region. Ailing Spanish banks have been promised access to a $120 billion loan facility from existing European funding mechanisms. More funds may be needed for bank bailouts. Last Friday, at a mini summit of the heads of the four big eurozone states — Germany, France, Italy and Spain — things became somewhat bitter. The German chancellor, Angela Merkel, was not convinced if the setting up of two new funds, one to aid bank deposit insurance and the other to act as a lender of the last resort for big banks in trouble, would be possible without having monitoring mechanisms independent of governments seeking such help.

Merkel is obviously buying time as things are getting too hot for her back home. The German parliament, Bundestag, is increasingly uneasy about the events overtaking the eurozone. Last week, Germany's constitutional court ruled that the government had not consulted the parliament sufficiently about the permanent bailout scheme to be launched on July 9, called the European Stability Mechanism, (ESM), with a corpus of $620 billion. Parliaments in 17 euro currency nations will have to ratify this fund so that it could be used to counter the financial crisis in Greece and other countries.

The ESM is to receive contributions from all 17 nations. The crisis-ridden economies of Portugal, Ireland, Greece and Spain (PIGS), for instance, have to contribute about $100 billion. But eurozone is in such a state of flux that the PIGS are drawing down huge amounts from a temporary bailout fund even before making their own contribution to the ESM. In effect, that puts over 75 per cent of the burden of the ESM corpus on Germany and France. This is precisely what the German people and the parliament will question in the weeks ahead.

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