Angela Merkel’s CDU and the centre-left SPD have agreed to begin formal coalition talks conditional on securing support from a meeting of 200 senior SPD members scheduled for Sunday. The party is scarred by its experience of coalition in the last decade, when its support slumped, but it’s probably the lesser of two evils since a new vote would be quite likely to increase Merkel’s support. She only just missed out on a rare overall majority first time around.
Assuming Sunday’s vote gives assent, talks proper will start on Wednesday. Hold your horses though. An entire policy slate will have to be thrashed out so the betting is an administration won’t be in place until late November at the earliest. In the meantime, euro zone policy negotiations are pretty much on hold.
To prove that point, an EU leaders’ summit on Thursday and Friday is unlikely to break new ground although of course all the hot topics such as banking union will be discussed.
The European Central Bank will announce on Wednesday the methodology which will underpin the health test of about 130 big European banks next year. It is caught between the devil and the deep blue sea. Come up with a clean bill of health as previous discredited stress tests did and they will have no credibility. But if rigorous checks find serious financial gaps, there is no answer yet to the question who will provide the ultimate funding backstop?
France, Spain and Italy want an immediate joint commitment by all 17 euro zone countries to stand by weak banks regardless of where they are. Germany, which fears it would end up picking up most of the bill, has dug in its heels. If a bank’s shareholders, creditors and large depositors can’t fill the gap, national government help may be required and if that is insufficient, what then? An answer to that question is needed fairly urgently and so far there’s not much sign that the “doom loop” of weak sovereigns propping up stricken banking sectors and each dragging the other down will be broken.