Eurozone avoids chaos, but debt crisis persists

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7 Sep, 2011 Updated Wed 7 Sep 2011 18:18 CEST
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The eurozone avoided a nightmare scenario after Germany's top court authorised bailouts, but caveats imposed by the judges risk limiting the bloc's options to resolve the debt crisis, analysts say.

All in all, the ruling came as a huge relief to officials in Brussels who are already struggling to finalise a new Greek bailout and an overhaul of the eurozone's rescue fund for debt-laden nations.

Had the court barred Europe's top economy from participating in bailouts, the eurozone would have entered uncharted territory, in losing the main contributor to rescues.

So far, the European Union and IMF have committed €273 billion to Greece, Ireland and Portugal.

The ruling "has an important bearing on the capacity of the union and of its member states to act, to surmount the sovereign debt crisis affecting certain member states," said European Commission spokeswoman Pia Ahrenkilde Hansen.

While Berlin can keep writing cheques to help save its weaker neighbours, the constitutional court said the government will first have to secure the approval of parliament's budget committee before shelling out any cash.

By forcing Germany to secure parliamentary backing for bailouts, the ruling adds another layer to the decision-making process when the eurozone is already struggling to act fast enough to calm impatient markets, economists said.

"Today's ruling should bring some relief to financial markets as a total chaos scenario has been avoided but it should not lead to euphoria," said ING Bank analyst Carsten Brzeski.

"A bigger say for German parliament in future bailouts could easily find copycats in other eurozone countries, undermining the clout of the beefed-up EFSF," he said, referring to the eurozone's rescue fund, the European Financial Stability Facility.

The court also appears to have ruled out a joint eurozone bond, or "eurobond," that market analysts and some governments such as Belgium and Luxembourg believe could be the antidote to the debt crisis.

The idea is for eurozone governments to band together to borrow money on the markets, which would bring down interest rates for weaker nations but make it more expensive for top-notch economies such as Germany or France.

Analysts say eurobonds would take the 17-nation eurozone closer to a federal system that it needs to survive in the long run. But French President Nicolas Sarkozy and German Chancellor Angela Merkel have ruled them out, pushing instead for governments to clean up their finances.

"The court's ruling clearly moves us a step further away from the fiscal union that many (ourselves included) have deemed necessary to hold the eurozone together," said Jennifer McKeown, economist at Capital Economics.

With the German court ruling out of the way, the eurozone can go back to worrying about finishing up a new bailout for Greece that would cost them another €109 billion, with the private sector chipping in an additional €50 billion.

Eurozone leaders agreed in July to provide Greece more money, but the deal had been held up by Finland's insistence on receiving collateral from Athens in return for its share of the bailout.

Another potential obstacle emerged this week when Slovakia's parliament speaker said his party, part of the ruling centre-right coalition, would try to delay a vote on expanding the powers of the EFSF.

Meanwhile, Greece is struggling to get back on its feet, more than a year after receiving its first bailout, with a deeper than expected recession making it difficult for Athens to keep to its deficit reduction targets.

The European Commission, European Central Bank and IMF suspended their mission in Athens last week to give the government time to come up with new

plans. EU officials said the mission would return by next week.

"There are many elements which will ensure that the eurozone will face more storms in the coming months," Janis Emmanouilidis and Fabian Zuleeg, of the European Policy Centre think tank in Brussels, wrote in a commentary.




2011/09/07 18:18

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