German Chancellor Angela Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe's revamped rescue machinery, threatening a consitutional crisis in Germany and a fresh eruption of the euro debt saga.
Mrs Merkel has cancelled a high-profile trip to Russia on September 7, the crucial day when the package goes to the Bundestag and the country's constitutional court rules on the legality of the EU's bail-out machinery....
If the court rules that the €440bn rescue fund (EFSF) breaches Treaty law or undermines German fiscal sovereignty, it risks setting off an instant brushfire across monetary union.
The seething discontent in Germany over Europe's debt crisis has spread to all the key institutions of the state. "Hysteria is sweeping Germany " said Klaus Regling, the EFSF's director.
German media reported that the latest tally of votes in the Bundestag shows that 23 members from Mrs Merkel's own coalition plan to vote against the package, including twelve of the 44 members of Bavaria's Social Christians (CSU). This may force the Chancellor to rely on opposition votes, risking a government collapse.
Christian Wulff, Germany's president, stunned the country last week by accusing the European Central Bank of going "far beyond its mandate" with mass purchases of Spanish and Italian debt, and warning that the Europe's headlong rush towards fiscal union stikes at the "very core" of democracy. "Decisions have to be made in parliament in a liberal democracy. That is where legitimacy lies," he said.
Joahannes Singhammer, leader of the CSU's Bundestag group, accused the ECB of acting "dangerously" by jumping the gun before parliaments had voted. The ECB is implicitly acting on behalf of the rescue fund until it is ratified.
A CSU document to be released on Monday flatly rebuts the latest accord between Chancellor Merkel and French president Nicholas Sarkozy, saying plans for an "economic government for eurozone states" are unacceptable. It demands treaty changes to let EMU states go bankrupt, and to eject them from the euro altogether for serial abuses.
"An unlimited transfer union and pooling of debts for any length of time would imply a shared financial government and decisively change the character of a European confederation of states," said the draft, obtained by Der Spiegel.
Mrs Merkel faces mutiny even within her own Christian Democrat (CDU) family. Wolfgang Bossbach, the spokesman for internal affairs, said he would oppose the package. "I can't vote against my own conviction," he said.
The Bundestag is expected to decide late next month on the package, which empowers the EFSF to buy bonds pre-emptively and recapitalize banks. While the bill is likely to pass, the furious debate leaves no doubt that Germany will resist moves to boost the EFSF's firepower yet further. Most City banks say the fund needs €2 trillion to stop the crisis engulfing Spain and Italy.
Mrs Merkel's aides say she is facing "war on every front". The next month will decide her future, Germany's destiny, and the fate of monetary union.
CHRISTINE LAGARDE, the new managing director of the International Monetary Fund (IMF), warned the world economy was in a “dangerous new phase” and that officials must take new steps to strengthen growth.
Ms Lagarde, speaking to international finance officials and economists in Jackson Hole, Wyoming, said the US should arrest a slide in house prices, while European banks must be required to boost capital to prevent the Continent’s debt crisis from affecting more countries.
The US and European Union should enforce long-term budget discipline to free up cash for short- term stimulus, she said.
“We risk seeing the fragile recovery derailed,” Ms Lagarde (55) said. “So we must act now.”
Ms Lagarde spoke near the end of a month when the value of global equities dropped by $5.7 trillion (€5.17 trillion) on concern global growth is slowing and governments will be unable to tackle sovereign debt burdens.
UBS AG and Citigroup Inc cut their forecasts for expansion of the world economy and predicted major central banks will leave interest rates on hold through 2012.
The slowdown provided the impetus for three days of debate at the conference, with Federal Reserve chairman Ben Bernanke saying the US central bank still has tools to boost its economy, without specifying what they were or whether they would be deployed.
“The stakes for the world economy are high,” said Allen Sinai, president of Decision Economics in New York, who put the likelihood of another global recession at 30 per cent.
Europe is struggling to contain a sovereign debt crisis that is nearing its third year and has left many banks from Spain to Greece in or close to insolvency.
Stress tests on 90 European banks published on July 15th showed eight lenders had a combined €2.5 billion capital shortfall, failing to ease concerns many of them remain vulnerable to a potential sovereign default.
Without an “urgent” recapitalisation, “we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis”, Ms Lagarde said. Bolstering banks’ balance sheets “is key to cutting the chains of contagion”.
The former French finance minister, who took the helm at the Washington-based IMF in July, said recapitalisation should be “substantial”, and called a mandatory move “the most efficient solution”. Banks should seek funds in financial markets first and later public money if necessary, including from the €440 billion European bailout fund, she said.
European Central Bank president Jean-Claude Trichet echoed Ms Lagarde’s call for banks to strengthen their balance sheets while saying any talk of a liquidity crisis was “plain wrong” because his institution had taken steps to aid banks, offering them unlimited cash for up to six months.
Attending his final Jackson Hole conference before retiring in October, Mr Trichet (68) avoided mentioning the debt crisis at length, preferring instead to defend the euro against critics who say its members are too diverse to unite under a single currency.
He used new research to show how the US has regional divergences similar to the euro area’s and noted how Europe has grown almost as quickly as the US and generated more jobs than it in the past decade.
While Ms Lagarde urged lawmakers to shrink budget deficits over time, she said they could still take steps now to stimulate expansion.
Making European budgets more sustainable “does not necessarily mean drastic upfront belt-tightening” because by addressing long-term risks such as rising pension costs, governments will have more leeway in the short term to fund policies that support job creation, she said.