Angela Merkel, chancellor of Germany, finds herself in a tight spot. She was put there by her own government as members of parliament in the ruling coalition on Wednesday passed a nonbinding resolution opposing the repurchase of debt by the European Stabilization Mechanism (ESM) when that vehicle replaces the existing euro zone bailout fund in 2013.
Reuters has reported that Merkel has not been hesitant about voicing opposition to changes in the current European Financial Stability Facility (EFSF) to boost its rescue power. However, this document exerts fresh pressure on her to avoid committing Germany to helping to underwrite the debt of the euro zone’s peripheral nations—this despite the hope of markets for those nations’ debt that Germany would agree to a comprehensive crisis plan.
A weekend election in Hamburg delivered Merkel’s party a stunning defeat, the worst since World War II, and now she may be forced, in a bid to avoid further trouncing—seven German states have elections scheduled for 2011—to abide by the document’s terms despite its nonbinding nature. She will need the support of the election winners to implement future reforms.
The resolution, voted on by her Christian Democrats (CDU), the Christian Social Union (CSU) and Free Democrats (FDP), recommended that buybacks of government debt by the ESM be eliminated. The motion, which demands that Germany’s government not agree to measures that might lead to a "transfer union,” will be put to a vote in parliament’s lower house this week.
In part, the document says, “Parliament expects that jointly financed or guaranteed purchase programs of government debt would be ruled out for reasons of constitutional and European law, and on economic grounds.” While it does not explicitly prohibit the purchase of bonds by the EFSF, it does up the pressure on what is perhaps the single most important measure investors hope will be approved at the meeting of euro zone officials in March.
The report said that analysts were bewildered by the action. Thomas Mayer, chief economist at Deutsche Bank, was quoted as saying, "I don't think they've thought through the implications. What do they want? It's not clear to me." He added that if the ESM were prohibited from buying bonds, three possible scenarios might result: "It's then either the taxpayer engineering a full bailout or the central bank buying all the bonds that cannot be sold in the market and taking the private sector out," he explained. "The third possibility they are not addressing is one that allows an unmanaged default. But I don't think anyone wants that."
He went on to say that if Merkel considers herself obligated to implement the resolution, "we will most likely end up in a situation where we will further burden the European Central Bank with the task of funding countries that cannot access the market."
Fabian Zuleeg, chief economist at the European Policy Center think tank, said that the resolution was not helpful, since Merkel “will want to keep a certain amount of flexibility in European negotiations.”