ANALYSIS: Germany at odds with euro partners over crisis resolution

By Alvise Armellini Nov 29, 2011, 19:29 GMT

Brussels - Germany's master plan for escaping the eurozone's crisis is clear: the currency bloc needs a legal straitjacket to prevent it from chalking up a debt problem ever again.

The problem is getting eurozone partners to go along.

Germany says a change of EU treaties is needed to enforce greater budget discipline. But many point out that the process will take years and will do nothing to solve the immediate problems of the European currency bloc.

'Nobody thinks that treaty changes are the right answer to the markets,' but given Germany's weight in Europe, everybody is accepting its demands 'with some resignation,' a senior EU diplomat sighed on Monday.

Treaty amendments would take 'about a year, under the best possible scenario,' to be agreed, he indicated. National ratification in the EU's 27 members could then take two more years - or longer if national referenda proved to be a stumbling block.

In the last week, risk premiums have risen to unprecedented levels in Italy, Spain, Belgium and France, while even a German bond auction went partially unsold - triggering calls for far more prompt action than the legal EU overhaul sponsored by Germany.

Politicians in France - the country most at risk of losing its top-notch triple-A credit rating, an event that would in turn undermine financial guarantees for the eurozone's bailout fund - have been the most vocal in urging a greater role for the European Central Bank (ECB).

Economists say the ECB could buy more government bonds of troubled eurozone countries to push down their debt financing costs, or provide the loans needed to boost the eurozone's rescue fund, to signal the presence of a robust safety net to nervous markets.

Germany has opposed those calls, out of stated concern that ECB action might fuel inflation and reduce the economic incentive for weak eurozone state to undergo necessary, but painful, budgetary adjustments and structural reforms.

That stance cannot continue, argues Simon Tilford, an analyst with the London-based Centre for European Reform.

'Germany faces a choice. It can stick to its guns and preside over the currency union, in the process sacrificing much of its post-war investment in an increasingly integrated Europe. Or it can put forward a workable quid pro quo for saving the euro,' he wrote in a commentary.

Jean-Pisany Ferry, a French economist with the Brussels-based Bruegel think tank, agrees that Germany will have to budge on the ECB and on the issue of issuing joint eurozone bonds, another crisis-busting measure recently sponsored by the EU's executive, the European Commission.

'Partners are unlikely to agree on major reform if Germany does not offer something in exchange,' Pisany-Ferry wrote in a comment piece published on his organization's website.

'In return for tougher fiscal targets and sanctions for missing them, Germany should end its opposition to the ECB acting as lender of last resort and agree to a gradual move to debt mutualization,' Tilford suggested.

German government reluctance has been influenced by strong public resistance to the notion of hard-working Germans bailing out fiscally reckless eurozone peers.

But Sebastian Mallaby, a senior fellow at the US-based Council on Foreign Relations, urged Germans to 'discard the myth ... that peripheral southern countries are the undeserving beneficiaries of a charitable transfer union.'

'The truth is that Germany derives myriad benefits from the currency union. It should pay more to save it,' Mallaby argued in a Friday column in the Financial Times.

Speaking ahead of eurozone finance ministers' discussions in Brussels on Tuesday, a diplomat outside the currency bloc predicted that Berlin would scorn partners' calls on eurobonds and the ECB until its demands on tighter eurozone governance had been fully met.

'At the end of the day, the Germans are in control of this. They are not going to agree to a transfer union until the mechanisms (on budget discipline) are in place, or at least agreed,' he said.

In the absence of stronger ECB action, with no movement on eurobonds, and inadequate funding for the eurozone's rescue fund, the currency bloc will be left 'muddling through' the crisis, the diplomat said.

Tentative talks are 'reportedly' ongoing to get the ECB to lend money to the International Monetary Fund (IMF), which would in turn be used to rescue needy eurozone members, said Alessandro Leipold, chief economist with the Brussels research group The Lisbon Council.

Such a solution, circumventing Germany's opposition to the ECB acting as eurozone lender of last resort, 'while Byzantine, might be broadly accepted and workable,' Leipold, a former IMF official, wrote in a column on Italian business paper Il Sole 24 Ore.