German Court Gives Go-Ahead For Creation Of European Stabilty Mechanism, A Move That Will Effectively Changing The Nature Of The European Union And The Euro

Thursday, September 13, 2012 07:10
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German Court Gives Go-Ahead For Creation Of European Stabilty Mechanism, A Move That Will Effectively Changing The Nature Of The European Union And The Euro

Tags: economy | European zone | world economy

Germany’s Federal Constitutional Court handed chancellor Angela Merkel a boon on Wednesday, September 12, by giving permission for Germany to become part of the European Stability Mechanism (ESM), a permanent structure through which monetary aid may be given to Eurozone countries in distress.

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This enables the plan announced by European Central Bank (ECB) president Mario Draghi to move forward. The plan would allow open-ended purchases of short-maturity bonds of distressed countries like Spain and Italy.
 
The bond purchases would give the countries much needed capital and keep the cost of that capital low, thus enabling the countries to stay in good standing with creditors.
 
There was a condition for the approval, however. Germany’s parliament must approve any request for an increase in Germany’s contribution to the fund, currently set at €190 billion (about $240 billion).
 
Germany’s economy is the largest and strongest in the Eurozone and the ESM would not have been able to come into existence without its participation.
 
The first meeting of the ESM board will be held on October 8. Opposition to ESM had been centered on the concept that it would create a debt-sharing arrangement between the Eurozone countries, making countries responsible for the debt of other countries, not just their own.
 
The move essentially does that, although that aspect of the deal is not talked about or set out as a focus. By doing so, it changes the character of the euro currency. The agreement is the starting point of a union in Europe of mutualized debt.
 
The question pondered by the German court was whether the new fund would lessen Germany’s ability to control how to spend German taxpayers’ money.
 
The move to create the ESM means the European Union is taking a step beyond just having a unified currency; it is now becoming a unified fiscal entity that will have different characteristics and become more empowered.
 
The new unity also may facilitate Europe’s ability to act more quickly. One of the hallmarks of the ECB has been its reluctance to act, something that was further complicated by the disparate views of Eurozone member countries.
 
The new unity among Eurozone member countries will move above that disparity and beyond obstacles like the question of approval by the German court that have kept it from being flexible and swift in its response to crises.

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