While the German constitutional court may have approved bailouts last week, anyone who says this was good news for the eurozone did not read the fine print in that 29-page document.
That’s the opinion of Wolfgang Munchau, a longtime FT editor who writes a weekly column on the affairs of the European Union.
In an editorial published yesterday, he points out that the constitutional court virtually ruled out permanent mechanisms like the European Stability Mechanism (the would-be successor to the EFSF) and the economic authority necessary to back up eurobonds because they would impinge upon the sovereignty of the German state. An expansion of the EFSF is only legal because it is temporary.
He believes that any permanent overarching economic mechanism that could right this crisis would require a popular referendum to (more or less) abolish Germany as an individual state altogether.
First, the ruling significantly increases the probability of default by one or several member states. This is a simple consequence of the Law of Large Numbers. There are now so many hurdles in place that a systemic accident is very likely to happen at some point. Do we really think the Bundestag, after having reluctantly accepted the need for a second Greek loan programme, will vote for a third? Or a second Portuguese or second Irish programme? Will they vote Yes once the EFSF starts buying bonds, or recapitalising banks? It takes a single No vote to trigger a default. When that happens, there will be no time left for diplomacy.
The ruling leaves a post-Stark ECB as the sole backstop that could prevent a break-up of the eurozone…This option is not going to work either.
Read his full editorial here.
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