On Friday, June 29th, German Chancellor Angela Merkel acquiesced to changes to a permanent Eurozone bailout fund—"before the ink was dry," as critics complained. Besides easing the conditions under which bailouts would be given, the concessions included an agreement that funds intended for indebted governments could be funneled directly to stressed banks.
According to Gavin Hewitt, Europe editor for BBC News, the concessions mean that:
[T]he eurozone’s bailout fund (backed by taxpayers’ money) will be taking a stake in failed banks.
Risk has been increased. German taxpayers have increased their liabilities. In future a bank crash will no longer fall on the shoulders of national treasuries but on the European Stability Mechanism (ESM), a fund to which Germany contributes the most.
In the short term, these measures will ease pressure in the markets. However there is currently only 500bn euros assigned to the ESM. That may get swallowed up quickly and the markets may demand more. It is still unclear just how deep the holes in the eurozone’s banks are.
The ESM is now a permanent bailout fund for private banks, a sort of permanent "welfare for the rich." There is no ceiling set on the obligations to be underwritten by the taxpayers, no room to negotiate, and no recourse in court. Its daunting provisions were summarized in a December 2011 youtube video originally posted in German, titled "The shocking truth of the pending EU collapse!":
The treaty establishes a new intergovernmental organization to which we are required to transfer unlimited assets within seven days if it so requests, an organization that can sue us but is immune from all forms of prosecution and whose managers enjoy the same immunity. There are no independent reviewers and no existing laws apply. Governments cannot take action against it. Europe’s national budgets [are] in the hands of one single unelected intergovernmental organization.
[Article 8] "The authorised capital stock shall be EUR 700 000 [700 billion Euros]."
[Article 9]: "ESM Members hereby irrevocably and unconditionally undertake to pay on demand any capital call made on them . . . such demand to be paid within seven days of receipt."
[Article 10]: "The Board of Governors . . . may decide to change the authorised capital and amend Article 8 . . . accordingly."
[Article 32, paragraph 3]: "The ESM, its property, funding, and assets . . . shall enjoy immunity from every form of judicial process . . . ."
[Article 32, paragraph 4]: "The property, funding and assets of the ESM shall . . . be immune from search, requisition, confiscation, expropriation, or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action."
[Article 30]: " . . . Governors, alternate Governors, Directors, alternate Directors, as well as the Managing Director and other staff members shall be immune from legal proceedings with respect to acts performed by them in their official capacity and shall enjoy inviolability in respect of their official papers and documents."
And that was before Merkel’s recent concessions, which allow this open-ended indebtedness to be funneled directly to the banks.
Why Did Merkel Cave?
"Reactions back home were devastating," reported der Spiegel. "[T]he impression was that [Merkel] had been out-maneuvered by Italian Prime Minister Mario Monti and Spanish Prime Minster Mariano Rajoy."
As of June 21, 13 of 17 countries still had not ratified the ESM; and the most important ratification needed was Germany’s, the largest economy in the Eurozone. Earlier, Angela Merkel had opposed using the bailout fund to pump money directly into struggling European banks. But at the EU summit that began on Thursday and dragged on well into the night, she finally relented. Late Friday evening, German lawmakers voted 493-106 in favor of the €700 billion ($890 billion) permanent bailout fund.
What caused Merkel to back down? According to an article in The Economist, the late night was "filled with bluff and bluster," in which
Mariano Rajoy, the Spanish prime minister . . . , along with Italy’s Mario Monti, had threatened to block any agreement at the summit unless their demands were met. Mr Rajoy obtained satisfaction, but the same is not quite true of Mr Monti, who had been the most adamant of the two.
Mr Monti declared himself satisfied, but caused considerable irritation to partners. Among the deals he had blocked was the "growth pact", a mixture of stimulus measures.
What Monti achieved by this maneuver was not clear:
"Who needs the growth pact? Not Germany," said one bemused participant. The euro zone’s fiscal hawks say the bond-buying mechanism will be little different from the existing system. "Mario Monti raised a gun to his head and threatened to shoot himself. In the end he wounded himself in the shoulder," said one scornful diplomat.
Maybe. Or maybe the bond-buying mechanism was not what he was really after.
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