ANALYSIS:France and Italy are canvassing support to equip the permanent euro zone fund with a banking licence
GERMANY HAS dismissed renewed talk of awarding the euro zone’s permanent bailout fund (ESM) a banking licence and, with it, unlimited financial capacity.
Ahead of tomorrow’s closely watched ECB governing council meeting, at which bond-buying measures for Spain and Italy are expected to be discussed, rumours of even farther-reaching plans shocked German politicians out of their summer slumber yesterday.
They made a rare show of unity after a newspaper report that France and Italy were canvassing support to equip the permanent euro zone bailout fund (ESM) with a banking licence.
This would allow the fund to access funding directly from the ECB, rather than through euro zone member states, offering sovereign bonds as collateral.
Such talk is political dynamite in Germany and anathema to most of the country’s political leaders. They say, almost in unison, that such a move would reduce the incentive for reform measures in crisis countries. Instead it would open the door to unlimited production of money, they fear, and create a real risk of inflation – a neuralgic point in Germany.
The most restrained reaction to the Süddeutsche Zeitung daily report came from Berlin’s finance ministry. A spokesman said it saw “no need” for such a move and denied any secret talks to that effect were taking place.
The discussion over awarding a banking licence dates back to the EFSF fund.
Yesterday the Süddeutsche quoted unnamed European officials who said a debate for an ESM banking licence is under way – not for the first time – and is supported by leading members of the ECB governing council.
Last week Ewald Nowotny, the Austrian central banker and ECB governing council member, suggested an ESM banking licence idea had merit but added there was no discussion among leading ECB officials.
The ESM, successor to the temporary EFSF fund, is expected to be activated later this year with a financial volume of €700 billion. Capital can be replenished if required but any addition to Germany’s original €130 billion contribution in loans and guarantees would require Bundestag backing.
Chancellor Angela Merkel’s allies in the ruling Christian Democratic Union (CDU) called for greater “calm and discretion”, saying it “makes no sense to speculate on a daily basis about ideas to solve the euro crisis”.
“It’s clear that the ESM should not become the ECB’s bad bank,” said Norbert Barthle, CDU budgetary spokesman in the Bundestag.
The CDU Bavarian sister party, the Christian Social Union (CSU) went on the warpath, attacking such plans to boost the fund’s firepower with unlimited liquidity as a “dangerous” attempt to bypass the ban on state financing by the ECB.
Picking up on that theme was the Free Democratic Party (FDP) junior coalition partner, which described such a mechanism as an “inflation machine and wealth-destroying weapon”.
“Madrid, Rome and Paris shouldn’t overplay their hand,” said Rainer Bruderle, FDP parliamentary party leader in the Bundestag.
Former ECB governing council member Jürgen Stark described such an initiative as a “clear breach of European law”.
“And we are already at a point of extreme stretching of European law, to put it mildly,” he said. “One has to block this immediately.”
However, the opposition Green Party backed the proposal, saying those opposed to it were “playing with the idea of a euro zone break-up”.
In addition, former Social Democrat (SPD) finance minister Hans Eichel described Berlin opposition to the idea as “completely overblown”.
“We have no inflation danger in Europe, we have a real danger of massive recession,” Eichel told reporters.
The ESM is currently the subject of a constitutional challenge in Germany. At oral hearings earlier this month, government lawyers were unable to say whether Germany’s potential exposure could be limited to its original pay-in of around €130 billion.
Such talk is political dynamite in Germany and anathema to most of its politicians
