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Mixed Signals from Karlsruhe, Clear Sign from Switzerland

Two events this week could impact upon the EU debt crisis in significant ways. The first is the ruling by the German Federal Constitutional Court in Karlsruhe that aid provided by Germany to indebted Eurozone states was in fact constitutional. The decision was in response to various legal complaints that had been filed against Germany’s participation in Eurozone bailouts, and represented an important success for German Chancellor Angela Merkel. In a speech delivered to the Bundestag on Wednesday, which had been delayed until after announcement of the court’s decision, Merkel described the ruling as a validation of her government’s handling of the crisis.

However, despite positive statements by the Chancellor, the ruling is potentially problematic with regard to future bailouts. The court emphasised the need for more involvement by the Bundestag, stating specifically that any future decisions on financial guarantees from Germany would need to be approved in advance by the Bundestag. It was unclear from this whether Bundestag approval would also be necessary for the European Financial Stability Facility (EFSF) to purchase government bonds of indebted Eurozone states going forward, a requirement that would make more cumbersome still the functioning of this rescue mechanism run by seventeen sovereign states.

In addition to questions left open by the court’s ruling is the question of whether the Bundestag will approve legislation to expand the powers of the EFSF agreed by European leaders in July. These include provision for the EFSF to buy government bonds in the secondary market, recapitalise banks and extend short-term loans in advance to Eurozone states headed for trouble. The Bundestag vote is set to take place on 29th September, while a test vote on the 5th gave Merkel only a nineteen-vote majority in favour. It is not clear from the test vote that the Chancellor can rely on her coalition to pass this legislation and failure to do so would surely have adverse effects on government stability.

While daunting, this challenge facing the German Chancellor appears to have had the benefit of forcing her to be more open and enthusiastic about how crucial it is that Germany do whatever necessary to save the Eurozone. Perhaps buoyed also by the fairly positive ruling from the constitutional court, Merkel has been decidedly pro-euro, stating in her speech to the Bundestag on 7th September that the euro is “more than a currency” and its failure would mean the failure of Europe. Along the same lines, the Chancellor has said that treaty revision should no longer be “taboo” and is necessary as a means to bind Europe closer together. Thus, it seems that the German Chancellor has finally decided to let her fellow politicians and compatriots in on the fact that Germany is not bailing out Greece and others because it is the nice thing to do, but because it is essential to a successful Europe, which is essential to Germany.

The second of two events to which I earlier referred is the decision by the Swiss National Bank to peg the franc to the euro. This is particularly relevant to the stance taken by Chancellor Merkel because the troubles facing Switzerland as a result of the rapid appreciation of the franc are just the sort of troubles that would face Germany outside the Eurozone. Using the example of Switzerland, one could make the argument that no open trading economy is safe in today’s globalised world of economic and financial interdependence, and the Eurozone is necessary for that reason. Or, one could make the more narrow argument, addressed to those in the domestic media and German public who have argued for a return to the D-Mark, that what is happening with the Swiss franc would certainly happen with the D-Mark and the dire effects on the export market that the Swiss are trying to avoid would similarly threaten German exports. The appreciation of the Swiss franc, and negative consequences that entails, is timely insofar as it helps to demonstrate what would happen if Germany weren’t committed to saving the Eurozone, and the currency union hence dissolved. Taking this into consideration, it is easy to see why Merkel defends the euro and all her government has done and likely will do to save it.

Some might argue that the case of Switzerland says nothing whatsoever about the possible benefits of Greece or another indebted state leaving the Eurozone, thought this is only partly true. To the extent that anyone could guarantee the cohesion of the Eurozone following the departure of any one of its members then the aforementioned argument is correct, but at this point no one can. There is no reason to assume that Greece leaving the Eurozone wouldn’t trigger a chain of events that would end with either a much depleted Eurozone of core states and an accordingly much appreciated euro or else the dissolution of the Eurozone and a lonely Germany with a fast appreciating D-Mark and a troubled export market. So, while the fate of Swiss policy is right now tied to the euro, EU leaders would do well to let the Swiss franc guide their policy also.

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