Merkel accused of betrayal as Germany "reinterprets" euro deal

style="float: right; margin-bottom: 10px; font-weight: 600;"Mon 1st Oct, 2012

A joint statement issued by the finance ministers of Germany, Holland and Finland on 26th September has been met with dismay in European capitals because it appears to call into question an EU deal agreed to only in June. 

The June agreement empowered the eurozone's new rescue fund, the European Stability Mechanism (ESM), to recapitalise troubled banks directly rather than loading bank debt onto national governments. This was considered a key development because the euro crisis has been caused to a large extent by huge debts accumulated by banks exposed by the 2008 financial crisis being "socialised" as sovereign - in other words, taxpayers' - debt. The transfer of private banking debt to public debt has brought countries such as Ireland to the brink of national bankruptcy and forced them to seek EU bailouts. 

The official statement of the Euro Area summit of 29th June recognised that the confusion of banking with sovereign debt had become untenable and affirmed that "it is imperative to break the vicious circle between banks and sovereigns," and declared that "the ESM could, following a regular decision, have the possibility to recapitalize banks directly." 

The agreement was met with German resistance - public opinion here is suspicious that the EU may try to bounce Germany into paying off the debts of other countries - but Angela Merkel was outvoted in the summit. Other eurozone states welcomed the development, however. Critics of Merkel argue that her insistence on treating all eurozone debt as sovereign and the responsibility of national governments alone was to transfer the burden of a structurally flawed euro and crisis-ridden European financial sector onto the shoulders of taxpayers in troubled economies and force the eurozone into an austerity spiral. Many hoped that the June statement represented a departure from this.

They are a lot less hopeful as a result of the recent unilateral intervention from Germany, Holland and Finland. In what has been seen as a retrospective "reinterpretation" of the June agreement, they declare that the new rules shall apply only to future, not past, events, and that "legacy assets" - bank debt that has been socialised as sovereign debt - shall remain the responsibility of national governments. This contradicts the June agreement.

It also represents a grave challenge for Spain, which agreed the strict terms of the recent rescue package for its banking system on the specific understanding that the June rules would apply. It now seems that the Spanish government is being told "post facto" that it is bound by terms it did not believe it had agreed to. One British commentator, the economist Ambrose Evans-Pritchard, said that Spain has been "betrayed" and that the "deal has been breached." He added:

"Can we believe anything that the Chancellor of Germany, the prime minister of Holland, and the prime minister of Finland say from now on? The EMU rescue edifice is built on sand."


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