Increasingly, the sovereign debt crisis is getting a transatlantic dimension: On the eve of the next EU summit, scheduled for March 1st and 2nd, not only EU-Commissioner Olli Rehn but also US Finance Secretary Timothy Geithner and the International Monetary Fund (IMF) will urge the Eurozone member states to boost the European Stability Mechanism (ESM), already endowed with half a trillion Euros. However, the obvious assumption behind these demands is that Germany further opens its (allegedly deep) pockets and pours more "good" money into the rough and turbulent sea that is the financial markets.
From the perspective of the EU Commission, US Treasury or IMF it may seem understandable why these institutions put German Chancellor Angela Merkel and her Finance Minister, Wolfgang Schaeuble, under such pressure. Brussels and Washington, Luxemburg and Wall Street have a strong interest in hedging risks resulting from potential further shocks in the Eurozone. At the same time, neither the EU institutions nor the US are able or willing to deploy financial means of their own. Someone else has to be found to expose himself and eventually pay the bill. Berlin is fundamentally right in refusing to accept that role for at least two reasons.
First of all, nobody has proven so far that a "bazooka-strategy" seriously impresses the capital markets and their stakeholders, be they an ordinary pension fund or a high-risk investor. The true indicators for these investors are the fundamental economic and fiscal data of the bond-issuing countries and their political and societal willingness for structural reforms. Take Italy, for example: As soon as Mr Monti has taken over the Premiership and announced a series of painful reforms, the markets calmed down and interest rates on Italian government papers eased. In this light, the only chance for Greece to survive and remain inside the Eurozone is fundamental reforms and strong efforts to regain competitiveness, rather than simply relying on a boosted ESM. The main criterion for an investor is trust, not cash.
The second reason has to do with the (already critical) perception of the so-called EU rescue policy in German public opinion. Up to a certain degree Chancellor Merkel could count on her fellow Germans' supportive attitude vis-à-vis her strategy to stabilize the Eurozone. However, the upcoming write-offs on Greek bonds caused by the Greece haircut hit hard on the balance-sheets of banks such as Munich-based Hypo Real Estate. Since this institute is fully owned by the Federal State, taxpayers' money is directly affected. Ms Merkel's voters will not particularly like this. Yet, a lack of German public support for EU policy will also threaten the Union's stability as a whole. This is in nobody's interest, no matter which side of the Atlantic he or she sits.
Against the increasing pressure from Brussels and Washington D.C. to bulk up the ESM, Germany finds herself in a dilemma between solidarity and solidity. Through the fiscal compact, Ms Merkel and Mr Schaeuble have more or less imposed a regime of strict solidity not only on their EU partners, but also on Germany herself. The so-called "Schuldenbremse" (debt brake) sets the tone for many years to come. EU institutions as well as the US administration dress up unlimited financial aid and eventual the mutualisation of debt as a matter of European solidarity. In this moralizing perspective, backing the Euro at any price is regarded as an act of political correctness. And yet, markets respond to the hard facts: Debtor countries who refuse to accept the basic rules of austerity risk drifting out of the Eurozone no matter the size of any firewall. For those countries, instead, who show the willingness and capability to reform their labour markets, pension or tax systems, the door to capital markets will remain open while the default spooks shall disappear. Against this logic, boosting the ESM would undermine rational economic incentives.
Hans F. Bellstedt is a Managing Partner of hbpa, a consultancy firm.