Relief across Europe at German ESM decision
The Local · 12 Sep 2012, 16:08
Published: 12 Sep 2012 16:08 GMT+02:00
- Constitutional Court approves euro rescue (12 Sep 12)
- Euro rescue sparks biggest court challenge (05 Sep 12)
- Constitutional Court mulls euro bailout fund (10 Jul 12)
The ruling helped key parts of the EU debt crisis jigsaw puzzle fall into place after months of unremitting bad news and anguish, potentially anchoring the bloc on a stronger, more united base, said analysts.
However they cautioned it would not be all plain sailing from here – with details needing to be nailed down and much haggling expected as member states make the painful compromises necessary to make the new system work.
The major breakthrough, they said, was that Germany's top court, in a landmark ruling watched around the world, rejected a raft of challenges against German ratification of the European Stability Mechanism (ESM) and the fiscal pact that will put a brake on accumulating more debt.
With the ESM in place and a beefed-up European Central Bank ready to intervene massively on the markets, the EU's crisis fighting machinery is taking shape, sparking a positive response on the markets where borrowing costs for weaker eurozone states continued to fall.
For 10-year benchmark government bonds in Spain, widely touted as the next bailout candidate, the return was around 5.60 percent Wednesday, compared with record unsustainable highs above 7.60 percent in July.
Significantly, Spanish Prime Minister Mariano Rajoy said he would wait and see about asking for a full bailout, after getting EU help for its stricken banks, keeping an eye on the nation's borrowing costs in the meantime.
"I still don't know the conditions nor whether it is necessary for Spain to request it," Rajoy told parliament. "We will see how the risk premium develops and the financing differentials ahead."
Italy also profited, raising funds at such sharply reduced rates to suggest that the tide may have turned after bailouts for Ireland, Portugal and twice for Greece pushed the eurozone to the brink.
Italian Prime Minister Mario Monti described the German court ruling as "excellent news because it removes the last obstacle for the implementation" of the ESM and fiscal pact.
The German court ruling is "another big step towards defusing the euro crisis," said Holger Schmieding of Berenberg Bank.
At the same time, he warned that "the euro crisis is not over yet. It comes in waves. Grave risks are still ahead," among them that twice-bailed out Greece could still leave the eurozone.
"But between them, the German government, the German court and the ECB have over the last six weeks made it even more likely than before that future waves of turmoil will be less vicious than the ones before," he added.
Analysts at Capital Economics were more sceptical.
The court decision and the ECB's expanded role in supporting eurozone states in need "suggests that a substantial firewall is now in place to prevent a Spanish or Italian default," they said in a note.
"But it could be months before this support actually materialises and, even then, (ECB) bond purchases will do no more than buy time," they said.
An early test comes Wednesday as an election in the Netherlands turns on widespread disaffection with the EU and resentment that weaker eurozone states are to get help even thought they flouted the bloc's fiscal rules.
European Commission President Jose Manuel Barroso meanwhile called for the setting up of a single European banking regulator in the shape of the ECB, saying it was an essential response to the crisis and a step to greater union.
"Securing the stability of the euro is the most urgent challenge," Barroso told the European Parliament, and a new regulatory system was an "absolute priority today because it is the basis for better managing banking crises".
EU leaders agreed the new banking supervisor in June as part of a deal to allow the bloc's rescue funds to directly lend funds to stricken banks instead of passing aid through countries and so adding to their debt problems.
It is a first step towards a banking union and sits alongside moves towards the deeper economic and political integration needed to tame the debt crisis which has brought the eurozone economy to a standstill.
Barroso said the overall objective was to push the EU towards a "federation of nation states" which was required "to win the battle against nationalists, or extreme populists."