Increasingly compelled to shoulder the burden of saving the eurozone, Germany has named the price its neighbour states must pay to be rescued.
German officials want to impose a system of economic surveillance on members of the currency bloc, who would be forced to surrender autonomous control of their domestic budgets to a regional authority.
Berlin aims to outline proposals for fiscal integration before a European Union summit on Dec. 9, increasingly seen by investors as the last chance to avert a collapse of the currency.
Once an unthinkable encroachment on sovereignty, the plan for a more centralized fiscal regime has now won the begrudging support of France, a country with a nationalist bent generally hostile to such an intrusion.
“Everyone has reconciled themselves to the fact that if you want to get Germany to cave in, you have got to surrender a lot of fiscal sovereignty,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.
To cave in would essentially see Germany become the guarantor of the eurozone through either the issuance of regional bonds, the aggressive intervention of the European Central Bank, or both.
First securing support for a fiscal union from all 17 members of the eurozone, however, could prove a monumental challenge.
“This is political dynamite,” Mr. Spiro said. “This is unprecedented stuff. It’s massively intrusive.”
Howling for some sort of decisive action out of the region’s seemingly endless emergency summit, global politicians, bankers and economists have grown exasperated at the perceived lack of urgency.
Last week’s German bond sale, which saw alarmingly limited demand for the once untainted securities, compounded concerns that the European bond market is broken and that contagion has begun to overtake the core of eurozone strength.
Global investors are growing reluctant to lend to eurozone sovereigns and are demanding an ever increasing risk premium to do so. Meanwhile, the flow of money between banks is slowing, repeating the kind of capital constraints that choked off credit after Lehman Brothers collapsed in 2008.
Amid what appears to be a new heightened phase for the crisis, Moody’s Investors Service cautioned on Monday that all government credit ratings in the region are at risk.
While patience clearly wears thin, the introduction of euro bonds or an extension of the ECB mandate would see Germany foot much of the bill and assume much of the risk for bailing out the region.
“Germany will essentially become the final backstop for the whole of the eurozone, and that does put a lot of pressure even on an economy the size of Germany’s,” said Raoul Ruparel, an economist at Open Europe, a think-tank based in London.
The solution markets seem to demand would have Germany put its own balance sheet and its credit rating on the line, he said. By guaranteeing the obligations of its neighbours, Germany would find its own creditworthiness sullied by the delinquency of others.
Officially, the role of the eurozone’s guarantor would not fall to Germany alone. But it would be by far the strongest backer of whatever regional authority takes on the task. After all, the eurozone’s next two biggest economies — France and Italy — struggle with their own debt burdens and exposure to contagion, let alone the obligations of other countries.
But Germany is insisting on stricter budgetary rules and penalties for missing deficit targets. “If they see themselves as the ultimate guarantor, they’re going to want to have a large say over where their money goes,” Mr. Ruparel said.
Fiscal division is considered the inherent weakness of the currency union and is blamed for the imbalances that led to unsustainable sovereign debt accumulation in the first place.
“This is precisely where a crisis serves its purpose,” said Andrew Busch, global currency and public policy strategist with BMO Capital Markets. Under normal economic circumstances fiscal reform would not be possible; member states wouldn’t stand for the interference.
“We can only achieve a political union if we have a crisis,” Germany’s Finance Minister Wolfgang Schauble said recently.
French support for centralized budgetary rules, however, does not signify a change of heart, according to Mr. Spiro.
France, which has consistently called for the ECB to apply its considerable financial resources to stabilizing markets, sees fiscal union as a means to end.
“I think (ECB President Mario) Draghi is just waiting for some kind of formal announcement that there is going to be a fiscal union, and when he gets the OK from Germany, the ECB will unleash its firepower,” Mr. Spiro said.
Additionally, proposing changes to the eurozone’s treaty could produce an excruciating months-long saga involving 17 separate parliaments.
However, reports have speculated on ways to bypass the treaty process to arrive at some sort of fast-tracked agreement, possibly involving a reduced number of eurozone governments. “They’ve got a million lawyers working on this day in and day out,” Mr. Spiro said.
To be determined, however, is whether the crisis is yet bad enough to justify Germany’s fiscal plan. “I don’t think we’re quite there yet,” Mr. Ruparel said, “but obviously things are getting very bad.”
Financial Post
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