MacroScope

Get me to the court on time

By Mike Peacock
September 12, 2012

Another blockbuster chapter in the euro zone epic.

Top billing today goes to Germany’s constitutional court, which is expected to give a green light to the euro zone’s permanent rescue fund, the ESM, albeit with some conditions imposed in terms of parliamentary oversight. The ruling begins at 0800 GMT. If the court defied expectations and upheld complaints about the fund, it would lead to the mother of all market sell-offs and plunge the euro zone into its deepest crisis yet.

Without the ESM, the European Central Bank’s carefully constructed plan to backstop the euro zone would be in tatters. It has said it will only intervene to buy the bonds of the bloc’s strugglers if they first seek help from the rescue fund and sign up to the strings that will be attached. The first rescue fund, the EFSF, could perhaps fill this role for a while but its resources are now threadbare, so without the ESM, markets would scent blood.

The Dutch go to the polls but with the hard-left Socialists seemingly losing support, the ruling Liberal party and moderate centre-left Labour are  neck-and-neck and look likely to form a coalition government committed to tight debt control and, more importantly, to the euro zone. So unless voters are lying to pollsters, some of the drama has leached out of this particular saga although it could take some considerable time to put a coalition together.

The other big plank of the day is the unveiling of the European Commission’s plan for banking union and cross-border supervision. Brussels is already at odds with Germany. Berlin wants only the 30 or so very biggest European banks to be put under ECB supervision, the Commission wants all banks to be under its umbrella, or at least the roughly 200 which account for 95 percent of euro zone banking assets. Further wrangling leading to delay would send a bad signal just as ECB chief Mario Draghi has cheered markets up. And it should be noted that the most profound parts of a banking union, particularly a joint deposit guarantee scheme to prevent bank runs, are not even on the table yet and are likely to take years to introduce.

Don’t think that that’s your lot. Bundesbank President Jens Weidmann breaks cover for the first time since he opposed the ECB’s new bond-buying plan at is policy meeting last week. Whether he reaffirms his anti- stance in today’s speech will be a key indication of whether he intends to simmer down now, or fight a guerrilla war against the plan to help Spain and Italy, which is already finding purchase with the German public and media. If he goes down the latter route, events of last year show there could be serious implications for how aggressive and effective the ECB can be in the bond market.

Angela Merkel, who appears perfectly happy with the Draghi plan, not least because it won’t directly cost the German taxpayer, but does not want to cut Weidmann loose, speaks in parliament, where she is also expected to address the court ruling on the ESM. The big question is whether Spain can stomach the conditions which will be attached to bond-buying help. The fact Spain’s debt numbers are going the wrong way will almost certainly force Madrid’s hand. Prime Minister Mariano Rajoy met his Finnish counterpart yesterday and today Finland’s newspapers are running stories saying Rajoy will turn to the ECB in order to avoid a full sovereign bailout. Crucially, he also seems to have said he has no objection to the IMF being involved in setting the conditions for help, which we had thought would be very hard to swallow. Rajoy speaks in parliament this morning.

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