Opposition SPD accuse Merkel of caving in to Monti

GERMAN REACTION:GERMAN CHANCELLOR Angela Merkel went straight from summit to damage limitation yesterday, insisting in Berlin that concessions to Italy and Spain on banking debt had not severed the "legal connection between [EU] solidity and solidarity".

Ahead of the Bundestag vote on the fiscal treaty and the permanent bailout fund, long-term bailout critics in her ruling coalition accused Dr Merkel of setting Germany on an irreversible path to pooled euro zone liability, with Berlin ultimately picking up the tab.

“The most problematic aspect [of the summit] is that we have finally, irreversibly given up the no-bailout clause of the EU treaties,” said Wolfgang Bosbach, a Christian Democrat (CDU) bailout critic, on German national radio.

Frank Schaeffler, a long-time bailout critic in the Free Democrats (FDP) said: “Things are moving ever closer to a transfer union.” Leading opposition SPD politicians accused the chancellor of caving in to Mario Monti and demanded the vote be halted.

“Italy has pushed through cash without conditions, something that’s going to catch on,” warned Carsten Schneider, SPD budgetary spokesman.

The German leader’s concession early in the morning cleared the way for EU leader-agreement on growth measures. She knew that returning to Berlin without such a package could have jeopardised the two treaty ratification votes, requiring a two-thirds cross-party majority to change the constitution.

And so, in the hours before the vote, Merkel officials worked feverishly to convince MPs unsure about the ESM bailout fund that the summit was no Berlin cave-in.

“We have made clear that this deal changes nothing with the current ESM,” said one government official. “And if, or rather when, things change in the future we will have to ask the parliament again.”

The political reality of the euro one crisis may have shifted in the night, breaking the connection between banking and sovereign debt, but Chancellor Merkel was in no mood to admit a loss of face before yesterday evening’s vote.

What was agreed at the insistence of Italy and Spain involved “medium-term” plans, she insisted, and had “nothing to do” with what was up for vote in the Bundestag. Proposed changes to the ESM, forced by Mr Monti, would only become politically relevant when a European banking supervisor was in place, she said, and then only with several further votes.

“The details about liability . . . still have to be negotiated individually, and I can predict now that they will be quite difficult negotiations,” said Dr Merkel. “We have entered a new area . . . talks won’t just take 10 days.”

The German strategy was to present wavering MPs in Berlin with an obstacle course of several high hurdles that Mr Monti, or anyone else, would have to clear before their bank debt demands were considered, let alone granted.

Any direct financing of banks was dependent on all leaders agreeing an EU banking regulator worthy of the name. Only when that was in place would direct recapitalisation requests from banks be accepted, filed by governments individually and processed on a case-by-case basis by the ESM. All applications would require the unanimous support of ESM governors – the member state finance ministers.

Smarting from her dawn defeat, Dr Merkel demanded that leaders commit to applying bailout rules in future as agreed, not rewriting them to suit circumstances.

“We don’t want any fuzziness again,” said Dr Merkel. “The discussion at times went in a direction as if there was no conditionality at all.” Even after yesterday’s parliamentary vote in Berlin, Germany’s ratification of the ESM depends on a constitutional court ruling on legal challenges, likely to be filed next week.