Germany’s top court will on Wednesday decide on the legality of Europe’s rescue fund, in a landmark ruling with major implications for future aid as the eurozone debt crisis continues to rage.
Jittery financial markets will be casting a nervous eye towards the Constitutional Court, as will Germany Chancellor Angela Merkel, who faces a crunch parliamentary vote on strengthening the European Financial Stability Facility (EFSF) rescue fund later in September.
Experts do not expect the court to slap down the EFSF, but many believe it may insist Germany’s Parliament has more say in any future rescues, which markets fear will slow down the European Union’s (EU) reaction time in future crises.
The court will “set strict conditions for future support packages, insisting that any significant decision on help for other euro members needs to be approved by the German Parliament”, said Holger Schmieding from Berenberg Bank.
The judges will rule on a complaint brought by six eurosceptics, who argue that the initial €110-billion ($154-billion) EU-IMF rescue of Greece in May 2010 and the setting up of the EFSF contravenes both German and EU law.
They say the rescues — for which Germany has set aside billions of euros worth of guarantees — break the “no bailout rule” in the EU treaties, which says one member state may not assume the debt of another.
The rescue packages are made up of loans, which in the case of the EFSF are made from funds raised on the markets against guarantees provided by eurozone governments.
Rebellion
The court ruling comes just weeks before the German Parliament, the Bundestag, votes on strengthening EFSF amid mounting scepticism both from politicians and from the public, with Merkel facing a rebellion from within her own coalition.
The boosting of the effective lending capacity of the EFSF from €250-billion to €440-billion means that German guarantees will rise from €123-billion to around €211-billion.
Several deputies have indicated they might abstain or even vote against the Bill when it comes up for vote, probably on September 29.
Merkel is assured of a majority as the opposition Social Democrats and Greens have both said they will back the Bill, but it would be a humiliating defeat for her, already weakened by poor regional election results recently.
The exact wording of the Bill, including the extent of Parliament’s involvement in future rescues, has been left until the court hands down its ruling.
But a draft drawn up by deputies from Merkel’s coalition, seen by AFP, proposes that Germany’s representative in the EFSF should veto rescue deals unless the Parliament has agreed to it.
Making decisions slowly
According to recent polls, the German public also believes Parliament should make its views known when future packages are agreed at EU level but is also sceptical that ever-bigger rescue funds will solve the eurozone debt crisis.
Markets, already nervous given apparent difficulties in Greece’s reform programme, could come under further pressure when traders digest the news, said Lutz Karpowitz, an analyst at Commerzbank.
“In the short-term, the news that the rescue fund as a whole is not declared illegal, could result in relief,” he said in a research note.
“However, on closer inspection, it should become clear to market players that any conditions [for future rescue packages] will slow down the decision-making process in Europe,” he added.
“In the final analysis, the decision of the Constitutional Court could therefore pressure the markets and the euro.”
The Constitutional Court is expected to deliver its verdict at 10am.
Financial analysis
European countries’ finances are in tatters as they face the headwinds of recession. This country-by-country analysis sheds some light on the plight of the states and their people.
Italy
Against a backdrop of nationwide strikes, the government of embattled Prime Minister Silvio Berlusconi is scrambling to secure parliamentary backing for a revised reform package, new tax rises and spending cuts. The 20% VAT bracket will be raised to 21% and a special 3% levy will be imposed on incomes of more than €500 000. Berlusconi said ministers would approve a new “golden rule” in the Constitution on balanced budgets and simplify local government.
A strike in Rome on Tuesday showed the strength of feeling that richer Italians had escaped tax rises and spending cuts. Analysts believe Italy could be the next Greece. Economist David Mackie at JP Morgan said: “Once you say to Italy ‘we will not allow you to fail’, they then have the upper hand. There has been a moral hazard issue with Greece for some time. Now we have one in Italy, too.”
Germany
Despite its stellar status, Germany is far from all-conquering. The Dax share index has lost 29% since the beginning of July — significantly worse than London’s FTSE 100 — while business confidence is tumbling at the fastest rate since the collapse of Lehman Brothers. New data showed a sharper than expected fall in industrial orders in July, especially from beyond the eurozone. German taxpayers are becoming increasingly sceptical about efforts to help eurozone strugglers such as Greece. That in turn has put domestic pressure on Merkel, whose coalition government has suffered a string of setbacks this year.
Spain
Another day, another denial from Spain that it has come close to requiring a bailout. Spain’s Finance Minister Elena Salgado rejected suggestions on Tuesday that the country nearly called in the International Monetary Fund in August, after a Spanish union leader reported that Prime Minister José Luis RodrÃguez Zapatero had told union and business leaders he had seen “the edge of the abyss, in the form of a bailout for the Spanish economy”. Whatever the truth, Spain is in deep trouble. To cut its borrowing requirement, the country has just started a privatisation programme, which includes selling a 30% stake in the national lottery, which it hopes will raise €9-billion, as well as part of the state airport authority.
The latest data has caused economists to fret that Spain may be heading towards recession.
Greece
Under heavy fire from German and Finnish politicians, George Papandreou’s left-of-centre government is facing accusations of backsliding. Having committed itself to huge cuts in state spending and a €50-billion privatisation programme to gain a second EU bailout package, the fear around Europe and the US is that Papandreou cannot force through the reforms needed to make the cuts work. The interest rate for the government to borrow for two years is now more than 50%, showing investors do not want to go near the Greek economy. Officials on Tuesday denied newspaper claims they had asked for faster bailout payments to fill the gap left by lower taxes and higher spending.
Portugal
There are plenty of economists who put Portugal and Greece in the same boat. Moody’s, the ratings agency, says Lisbon’s attempts to cut state budgets are failing and it is only a matter of time before officials seek a second Brussels bailout — the first entailed €80-billion of loans. Prime Minister Pedro Passos Coelho says more cuts will do the trick, despite expecting the economy to contract this year and next.
Finance Minister Vitor Gaspar says the Portuguese should expect to pay more taxes next year, including higher VAT and increases for higher earners and companies making big profits. Protests are likely as unemployment is set to head toward a peak of 13.2% next year.
Britain
Chancellor George Osborne is to downgrade his growth forecasts for the United Kingdom after a series of gloomy business surveys and sharply declining consumer confidence. Stock markets were spooked on Monday when a survey of the vital services sector was the worst for a decade. Services make up 75% of economic activity. A similar survey of manufacturing last week was dire. Construction, once a booming industry, has shrivelled. A double dip recession beckons and some economists believe the economy may already be contracting. The chancellor is sticking to his austerity plan and hoping the Bank of England governor, Mervyn King, can ease the pain by maintaining low interest rates.
Switzerland
The economy has appeared largely immune from the effects of the current crisis and grew robustly in the second quarter. GDP climbed by 2.3% from 2010 but the latest quarterly increase — 0.4% — was the lowest since 2009, causing economists to worry that the strength of the Swiss franc would put a further brake on expansion this year and into 2012. That is why the Swiss National Bank in effect devalued its currency on Tuesday. The Swiss franc, seen as a safe heaven, had moved close to parity with the euro but its strength has made the country’s exports much more expensive and harmed its tourism industry. Swiss residents have been crossing into Germany to shop.
Even so, economists warned that the powers of central bankers can be very short-lived when it comes to currencies
Ireland
Ireland is in the depths of the worst recession in its history, but there are signs it may have turned the corner. Ireland was bailed out by the IMF with €85-billion last year, but some economists believe the austerity measures introduced by the Dublin government are now paying off.
Borrowing costs have fallen and GDP growth is forecast at 1.8% this year. Still, while Ireland is banking on exports to return it to economic growth this year, it also desperately needs to halt the decline in consumer spending in order to meet growth targets crucial to dealing with a mounting debt pile. December’s budget already promises to cut spending and raise taxes by at least €3.6-billion. — AFP,