Friday, October 12, 2012

The Bundestag Is Blocking Spain's Bailout

Here’s what we do know: the Spanish economy is imploding, government revenues are falling despite higher taxes, and the bank run continues. Spain is running out of runway, and something will have to happen.

Europe has told Spain that, if she applies for assistance from the Eurogroup and agrees to the Troika’s terms, the ESM will lend directly, and the ECB will buy Spanish bonds in the secondary market.  This would appear to be the obvious next step.

However, Spain has not yet applied for assistance, and has given three reasons for not applying. First, she says she doesn’t need the money, which is a blatant but understandable lie. Second, she says that she won’t apply until the Troika’s terms are known, and the ECB is more explicit about the size of its intervention in the bond market. Rajoy doesn’t want Spain to be living on an IV drip like Ireland and Portugal, and who can blame him? Thirdly, Spain will not apply for aid unless she can be assured of receiving it. That’s the really scary part.

According to Reuters:

“Germany has sent Spain strong signals that it should hold off because German Chancellor Angela Merkel is wary of presenting a fresh aid request to her parliament, euro zone sources say. Spanish officials see more risks to moving ahead quickly without assured German backing, than in delaying a request.”

There you have it: Even if Rajoy were satisfied about the terms of the deal he needs, he can’t apply because Merkel won’t put it before the Bundestag. Given all the happy talk in Brussels and Frankfurt about how Europe is moving forward to resolve the Spanish crisis, there is only one problem: the Bundestag. Nothing can be done for Spain or anyone else unless the Bundestag approves. Not all Eurozone parliaments, just one: Germany’s. The entire fate on Europe hangs upon the political calculus of one country’s legislature. That’s because of the rulings of the Constitutional Court.

I will admit that it is very unfair to Germany to put her in this very awkward position, where she alone has a veto over the Spanish bailout. Perhaps when General Clay was “helping” the Germans to write their constitution, he should have made it a bit less democratic.

Be that as it may, this is Europe’s latest problem: “The Germany that can say no”.  It is telling that Merkel and Schauble are telling Spain to wait. Presumably they hope that the Bundestag will be more accommodating when Spain is teetering on the edge of default. That’s reassuring.

It used to be that one thought that Rajoy was negotiating with Europe over Spain’s bailout. It is now clear that he is negotiating with the Bundestag, which is much less charitable. At this inopportune juncture, democracy decides to rear its ugly head.

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