Good week for the euro - but also a warning


The German chancellor says it's a "good day for Germany and a good day for Europe". Better than that, it's been a good week.

First, the European Central Bank delivered on its pledge to do more - possibly quite a lot more - to hold the euro together. Now the German constitutional court has ruled in favour the new European bailout fund, the ESM.

Cue sighs of relief in financial markets around the world. But there's an irony in both decisions which should not be lost on the financial markets or Europe's politicians: the institutions that seem to be most keen to put control over the future of the euro into the hands of the voters are the ones that are least accountable to them.

This is quite clear in the case of the German constitutional court's judgement. As expected, there were conditions attached to the court's decision to allow the ESM to go ahead: Germany's potential liability must remain at the current level of 190bn euros (£152bn; $245bn).

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Anything more, and the government has to go to parliament for approval; and both German houses of parliament, not just the Bundestag, have to be informed about everything involving the ESM.

There's nothing here that will come as a surprise to Chancellor Merkel. Nor will it prevent the ESM operating broadly as expected. That is certainly what the financial markets have concluded.

A quick reminder of the nuts and bolts: the deals that have been done by European governments in the past year give the EFSF and ESM a combined capacity of 700bn euros - about 300bn of which has already been committed to the Greek, Irish and Portuguese bailouts and helping the Spanish banks.

Germany's 27% share in the ESM when it fully takes over from the EFSF in 2014 will come to just under 190bn euros. I don't think any serious politician - in Germany or anywhere else - believed it would be possible to increase Germany's liabilities without returning to national parliaments.

In their judgement, the judges also stated that "borrowing by the ESM from the European Central Bank" would be incompatible with EU law, but investors don't seem concerned by this, either.

In the past, it's true that some had suggested that granting the ESM a banking licence would enable it to increase its lending capacity, because it would then be able to borrow directly from the ECB.

But in a recent speech in Austria, the prospective head of the ESM, Klaus Regling, said flatly that was wrong. "It's a wrong assessment… the lending capacity of the EFSF is fixed and the lending of the ESM is fixed."

All that a banking licence would do would be to make it easier for the ESM to borrow up to that limit. And anyway, any change in the structure of the fund that did have the effect of raising the fund's potential lending capacity would have to be ratified by parliaments.

So, the German constitutional court has not caused havoc. It has allowed the current strategy for saving the euro to continue.

But it has underscored that Germany's leaders should not be seeking to "get around" the voters in their solutions to the crisis. Whatever schemes they might come up with to hold this project together, if they can't make the case to parliament - and the voters - they should not be making it at all.

Something similar can be said of the ECB's new policy, which commits "unlimited" resources, but still clings to conditionality as a way to put the responsibility back into the laps of the politicians.

Martin Wolf deftly makes the point in his latest column for the FT: "The ECB is saying that it will seek to eliminate the threat of a break-up, except when this threat is most real, which is, of course, precisely when the country is failing to meet policy conditions. Investors know that electorates might choose a government that has no intention of sticking to agreed conditions. What happens then?"

Ultimately the decision whether to "do what it takes" to hold the euro together is a political one, which the ECB, understandably enough, wants to be taken by politicians, not the central bank. In a democracy, those politicians, in turn, should be accountable to the voters. Germany's constitutional judges surely feel the same way.

The ECB and Germany's highest court have done their bit to save the euro. The question they've left unanswered is whether Europe - and especially Germany's politicians - can do what it takes to persuade the voters that the single currency is worth saving.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 98.


    Really who told you that with the 4 stages.Target2 system is not really important as it just shows inbalance within the system.
    Money printing is the crucial piece and ECB is miles behind US.I think 3% to 18% in the US if compare QE level to GDP.
    So expect a raising Euro and not a collapse

  • rate this

    Comment number 97.


    Depressions take two different forms (I thought the same too - many years of little or low growth), but this has been mismanaged badly and I now see a cliff with us all on the edge.

    This started in 2008 and we are now at the end of the first stage of 4 stages. Look at TARGET2 which covers central bank balances. Germany has the most to lose and many others are on the verge of breakdown.

  • rate this

    Comment number 96.



    The Euro (and indeed the UK fake austerity budget) are diversions to stop us seeing the real problem - that is the banks. The banks have created far far too much debt and this is crushing the economy by preventing the re-pricing of assets down to an economically viable level.

    Except we aren't allowed to see this - the markets divert us to the Euro then the US Dollar.

  • rate this

    Comment number 95.

    "84 JFH bet you dont want to hear JMK's views on small government."

    I see not merit is big government! But I also see no merit is privatising the natural state monopolies or using regulation to protect private monopolies and cartels(banks!).

  • rate this

    Comment number 94.


    I see.Well I hear from this collapse since 2010 and it didnt happen and I doubt very much it will happen in the next 5 years.
    I think nothing is critical anylonger only stagnation still for some time to come.

  • rate this

    Comment number 93.

    84 JFH bet you dont want to hear JMK's views on small government.

  • rate this

    Comment number 92.


    The ECB is supplying short-term liquidity/easing of interest rates for borrowing. The underlying issue is that many Eurozone countries and their banks are insolvent and cannot pay back what they owe.

    The ECB is also going to have to take a massive loss at some point when it all collapses. Germany's share of ECB liabilities is 22% with Spain and others all on the hook for their share.

  • rate this

    Comment number 91.


    Not really see your point.Whats wrong with ECB its a normal central bank like BankofEngland or FED.
    And not even related much to EU at all.There some EU countries out there who can ignore ECB completly

  • rate this

    Comment number 90.

    The EFSF/ESM is the fake that keeps TPTB propping up the failed states. They brought out the big guns and kept the bond markets happy for a bit. Real truth is that there aren't many places to go from here. The next failure which is surely to be Spain will be a death blow, Spain won't succumb to ESM pressure on reform whilst it is having such a bad time so it won't go for a bailout until too late.

  • rate this

    Comment number 89.

    "any reduction in state spending damages the interests of the apparat."

    And prey tell me where can I find this reduction in state spending. I've looked in UK and can't find it anywhere.

    Oh and who are these "ordinary people"?

  • rate this

    Comment number 88.

    Whilst taking my children to school this morning we were surprised by 10 Eastern Europeans who had been sleeping rough in the local park.

    Add this to the other Eastern Europeans that I saw sleeping rough under the ramp to the car park for the shopping centre this morning and you get the picture.

    Large parts of Europe have collapsed and people are heading over here en masse for jobs and benefits.

  • rate this

    Comment number 87.

    The problem with money actually lies with accounting for it, which must come before being accountable for it.

    Accounting standards in all their inimitable forms, crawled out of the slime of profiting by advantage, and are hidden today under a rock, whilst everything and anything else but, take blame for financial and economic disaster. Thinking is neanderthal on root cause and blames.

  • rate this

    Comment number 86.

    Good week for the Euro?! You are joking right Steph?

    The ECB has had to step in and save the currency because those USELESS EU politicians cannot. The ECB is a temporary measure only as it won't fix the underlying problems which these politicians have caused and refuse to fix.

    God help the people of Europe as the balloon gets bigger - meaning a louder BANG at some point soon.

    UK Referendum NOW.

  • rate this

    Comment number 85.

    You nailed it your title: Good week for Euro, but a huge-big WARNING that is so big-so huge, most normal, little people won't even notice it: I don't think I've noticed the half of it...maybe I just smell it...
    I feel in my bones, that something is not quite right, & that ESM is a highly powerful decree for democratic, soverign countries to swallow while remaining democratic & sovereign..

  • rate this

    Comment number 84.

    80.Eddy from Waring

    You'd better modify the wiki page then, if this creature of the blogs is so important!

    I'd still rather like to hear JMK's views!

  • rate this

    Comment number 83.


    `Why are small reductions in overspending referred to as austerity?'

    Because any reduction in state spending damages the interests of the apparat. These are people with serious influence.

    How else can Osborne's attempt at reducing state spending have failed even though ordinary people are being punished with cuts and closures.

  • rate this

    Comment number 82.

    Death by a thousand cuts continues. Maybe by 2020 their vision will improve!
    Then again . . .

  • rate this

    Comment number 81.

    [Article 30]: “...staff members shall be immune from legal process…& shall enjoy inviolability in respect of official papers...”
    Q. These officials can’t be held accountable for anything?...Treaty establishes intergovernmental org to which we are required to transfer money within 7 days, org that can sue us but we can't sue it.
    All this power - to UNELECTED intergovernmental org?

  • Comment number 80.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 79.

    How solid is ESM?
    [Article 10]: “The Board of Governors may decide to change authorized capital & amend Article 8 accordingly.”
    Q. 700 billion fund, or just the beginning of the fun? ESM can restock up the fund as much as it wants to, any time it wants to? We would then be required under Article 9 to irrevocably & unconditionally pay up?


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