Germany’s Bundesbank has issued a blistering critique of EU bail-out policies, warning that the eurozone is drifting towards a debt union without “democratic legitimacy” or treaty backing.
“The latest agreements mean that far-reaching extra risks will be shifted to those countries providing help and to their taxpayers, and entail a large step towards a pooling of risks from particular EMU states with unsound public finances,” said the bank’s August report. It said an EU summit deal in late July threatens the principle that elected parliaments should control budgets. The Bundesbank said the scheme leaves creditor states with escalating “risks and burdens” yet no means of enforcing fiscal discipline to make this workable.
There are no plans as yet for EU treaty changes to correct these distortions. “Unless there is a fundamental change of regime involving a far-reaching surrender of national fiscal sovereignty, it is imperative that the ‘no bail-out’ rule – still enshrined in the treaties – should be strengthened by market discipline, rather than fatally weakened,” the report said.
The wording is uncannily close to language used by plaintiffs challenging the legality of EU rescues at the country’s constitutional court. The judges are expected to rule in September or early October. Any finding that the bail-out fund (EFSF) breaches Germany’s Grundgesetz could have shattering effects on creditor confidence in monetary union.
The broadside came as two Chinese officials called on Europe’s leaders to “show a responsible attitude”, warning that failure to create a workable rescue machinery had become a threat to global stability.
“The euro debt crisis has now been going for nearly two years since the end of 2009, and has spread like the Black Death of the 14th century across the eurozone countries,” wrote the two officials, including the former chief of global affairs at the central bank.
China has been a crucial prop for the eurozone, accumulating some €700bn of EMU bonds over the past decade as it seeks to lower dependency on the the US dollar. Beijing has pledged support for Italy and Spain over recent months but there are signs that the Politiburo is losing patience with Europe’s leaders.
For now the European Central Bank is shoring up the Spanish and Italian bond market. It bought a further €14.3bn (£12.5bn) of eurozone bonds last week, less than the week before. Its total holding has risen to €110bn.
The ECB is capping yields of Italian and Spanish bonds at just under 5pc with carefully-calibrated purchases. The policy has succeeded so far but is likely to be tested as trading returns to normal next month and the ECB nears its implicit limit. Italy must issue or roll over €68bn by late September.
- Germany’s Central Bank Criticizes Bailout Plan (online.wsj.com)
- Germany Speaks Out Against Eurobonds, Transfer Union (forexlive.com)