Germany's Central Bank Criticizes Rescue Plan
The euro zone's rescue plan to end its sovereign-debt crisis will weaken the foundations of the currency union and could increase states' tendency to build up debts, Germany's Bundesbank warned Monday, taking a hard stance against an agreement that German Chancellor Angela Merkel still has to persuade her government to support.
The deal, which euro-zone leaders agreed to at a summit on July 21 but requires the approval of euro-zone governments, represents "a big step towards sharing the risks of shaky state finances and economic mistakes" across the euro-zone, the Bundesbank said in its monthly report.
That "weakens the foundations of the currency union", which is based on "fiscal responsibility and discipline through the capital markets," the Bundesbank said. Without a fiscal or political union, July's deal could put pressure on the European Central Bank to "loosen the common monetary policy" and increase states' tendency to build up debts, the bank said.
In the agreement, European Union leaders approved expanding the size and powers of the EU's rescue fund, the European Financial Stability Facility. The Bundesbank said that since the deal doesn't offer donor countries much more influence over the fiscal policies of bailed-out states, it could increase states' tendency to build up debts.
Germany's central bank has long been a staunch opponent of loose monetary policy. Bundesbank President Jens Weidmann opposed the ECB's recent decision to reactivate its bond-buying program to buy Spanish and Italian debt, a person familiar with the matter said earlier this month. Mr. Weidmann's predecessor, Axel Weber, was an outspoken opponent of the ECB's bond purchases.
Ms. Merkel has resisted pressure from some EU officials and euro-zone countries to support euro-zone bonds, which have been suggested as a solution to the bloc's debt crisis. On Sunday, she warned that euro-zone bonds would collectivize debt without transferring national budget sovereignty to Europe. Such bonds would lead to a "debt union and not a stability union," she said.
Still, Ms. Merkel expressed confidence that her center-right coalition would approve the changes to the euro zone's rescue fund agreed in July. "I expect that we will get it [a majority]," Ms. Merkel said.
The Bundesbank's criticism of July's deal won't make that task any easier. Several lawmakers from Ms. Merkel's Christian Democratic Union party and from her junior coalition partner, the Free Democrats, have already announced they will vote against the changes. Ms. Merkel plans to hold an extraordinary meeting of CDU lawmakers Tuesday to try to approve the changes by the end of September.
Euro-zone governments are rushing changes to the EFSF through their parliaments, in order to take pressure off the European Central Bank, which has bought euro-zone government bonds worth about €36 billion ($51.82 billion) over the past two weeks after the debt crisis spread to Spain and Italy. The ECB is keen to hand responsibility for bond-buying to the EFSF, but can only do so once the fund is authorized to buy bonds in the secondary market.
The Bundesbank also reiterated its proposal for an automatic three-year extension clause for euro-zone government bonds, to be activated when a country seeks help from the European Stability Mechanism, a permanent rescue fund due to launch in 2013.
Still, despite the euro-zone's debt woes, Germany's economic recovery is likely to continue in the second half of 2011, albeit at a slower pace, the Bundesbank said.
The central bank confirmed that Germany's gross domestic product is likely to expand by around 3% this year, despite the sharp slowdown in the second quarter and risks from the euro-zone debt crisis.
Germany's economy grew by just 0.1% quarter-to-quarter in the April-June period, down from 1.3% in the previous quarter, the state statistics office said last week.
The second-quarter slowdown "is in itself no evidence that the German boom has softened due to weaker overseas demand and increased uncertainty," the Bundesbank said.
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