Eurozone Bailout: Germany Decides to Pay Later Instead of Now

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Germany has made it clear once again that it believes the new 500 billion euro European Stability Mechanism (ESM) is adequate for future bailouts in the region. The International Monetary Fund and other countries that use the euro as their currency believe otherwise. Germany is the primary “bank” for bailout funds though, so it has the power to reject the wishes of the other parties. Germany may find that what it will not invest into the ESM now, it will invest later if the size of the fund is inadequate for the series of bailouts that may come.

The IMF’s plan is to take the money left in the temporary European Financial Stability Facility (EFSF) and roll it into the permanent fund. In addition to the 500 billion the new fund would raise, the total balance with the rollover could total 700 billion euro. That, the IMF argues, is closer to the amount that may be needed if Spain, Portugal and Italy begin to lose the faith of the capital markets because of their sovereign debts and growing deficits.

Merkel has voiced her support of the euro and said it is essential to Germany that it survive. Her political opponents care less about the alliance and the ability of Greece, and perhaps other financially weak nations, to stay in the group. Merkel’s decision to support the ESM at only the 500 billion euro level is a sign that she cannot do otherwise without losing her job.

The recession, which has deepened among the weakest nations in the region, as well as the unemployment, which has made matters worse, probably will cause the international capital markets to desert Portugal and Spain. Austerity measures adopted in those countries could make their economic contractions worse. A bailout of Portugal may not be much larger than that of Greece — perhaps 200 billion euro, by some estimates. Spain would need more money than that, which would test the balance of the fund. Italy would break it.

Germany will not support a larger bailout fund. This might be considered “kicking the can down the road.” If there is a miraculous turnaround in the eurozone’s fortunes, the Germans can look back on the wisdom of their decision. If not, they will need to put up more money to salvage the alliance later, as long as Germany’s current position of the value of the euro stays in place.

Douglas A. McIntyre