Irish debt relief hopes slide down Berlin's agenda

THE REPUBLIC’S hopes of securing bank debt relief has slipped further down Germany’s political agenda.

Irish Government officials are working the back rooms of Europe’s capitals, trying to put flesh on the bones of a June promise by European Union leaders to look again at Ireland’s bailout programme.

But German chancellor Angela Merkel indicated yesterday that agreement on such a deal is so far away that it has yet to even come near her chancellery, let alone cross her desk, for discussion.

“There’s no change on my agenda at the moment,” she said.

Occupying her autumn agenda instead, she said, was how to keep Spain and Greece off the rocks and wind in the sails of Europe’s integration efforts. Seven years in office and three interlinked crises – banking, economic and euro zone – have left their mark on Germany’s chancellor. Dr Merkel is far less fresh-faced than in 2005, but her stamina remains as remarkable as her political popularity. A poll for Der Spiegel shows her as Germany’s most popular politician, with two-thirds support.

Dr Merkel wants a clear run at a third term next year, piling pressure on EU leaders at three summits between now and Christmas.

Days after Germany’s constitutional court backed the ESM bailout fund and the fiscal treaty, Dr Merkel said she was anxious to discuss with EU leaders “whether we need more commitment” on fiscal and financial affairs.

She is angling towards talks on a new European treaty, something Berlin’s exhausted partners want to put on the long finger. The roles are reversed when it comes to the latest euro zone crisis initiative: a European banking regulator.

Many European countries, led by France and Spain, are anxious to press ahead with a big-bang regulator to oversee 6,000 European banks. That would open the door to a direct recapitalisation of Spain’s banks from the ESM fund. Berlin, however, is on a go-slow. It wants European oversight for just 25 systemic banks. And political disagreement on this point, it believes, precludes discussing practical measures such as hiring employees, finding premises or, crucially, Spain’s hopes of swift bank recapitalisation.

“First we need a regulator with powers to intervene, then we can talk about the recapitalisation of banks,” said Dr Merkel. “That is the order, and it is inalterable.”

This stand-off between Spain and Berlin will hold up political agreement on any debt relief for the Republic. But having a Spanish smokescreen might be no bad thing for the Government if it obscures a lack of agreement on its own deal.

Berlin says it wants a European banking regulator that is up to the job. Ideally, it would like to avoid further bailouts before next year’s election or, if that’s not possible, any special deal for Spain without full EU-IMF oversight.

The bank regulator stand-off means slippage on Spain and delays for Dublin. But the closer Germany drifts to September 2013, the lower the appetite of MPs seeking re-election to back anything in the Bundestag their voters might understand as a second bailout for Ireland.

A further complication is that Dr Merkel’s Bavarian allies, the Christian Social Union (CSU), face not just a general election next September but also a state election. After a historic defeat last time out, CSU politicians are already cranking up the populist rhetoric. Last week the CSU denounced ECB president Mario Draghi as the euro zone’s “counterfeiter-in-chief” for his bank’s unlimited bond-buying programme. Yesterday CSU leader Horst Seehofer suggested that Germany’s share of ECB bond-buying should count towards its €190 billion liability ceiling in the ESM bailout fund.

Dr Merkel dismissed his attempt to link liability for two institutions as unpopular because they are separate. But his demand is a populist sign of things to come here as Germany enters election mode.

With that in mind Dr Merkel insisted – primarily for domestic audiences – that crisis countries would need to continue structural reforms that, as she put it, “cost no money but have a positive economic effect”.

Her own government – on track with its “debt brake” fiscal consolidation – has presented a new budget easing up on the austerity pedal ahead of the election, just as the economy shows unmistakable signs of cooling off.

“If we saved too much it would affect domestic consumption and Germany would have an imbalance again in too-high exports,” said Dr Merkel, acknowledging a common criticism of Berlin’s neighbours. Plans to cut pension contributions and reform taxes would, she said, “boost consumption and reduce imbalances”.

Ahead of next year’s election, the German leader plans to shift from crisis-fighting measures to concerns over how they can be democratically legitimated.

“Criticism of Europe doesn’t arise because people don’t like Europe, but because they see weaknesses in how it functions,” said Dr Merkel, ever the sober-minded scientist. “We need to tackle these weaknesses and make something better out of it.”