Schäuble comes out strong for #EUReform

The latest intervention by one of Europe's most important politicians shows that, in the wake of the shock European elections result over the weekend, Europe’s leaders are waking up to smell the coffee.

Writing a guest piece for Die Welt, Germany's Finance Minister Wolfgang Schäuble argues:

What are the lessons of the European elections? Surely not a mindless pursuit of 'More Europe'. We need a more intelligent union.

He continues:

The question 'More or less Europe' - as one alternative or the other- has been posed falsely. On one hand we need a stronger Europe, particularly for the big and overarching questions, that no [one] state can solve alone. And, on the other, we also need a greater willingness to consistently apply the subsidiarity principle.

Setting out what he thinks Europe should be for, Schäuble says:

An intelligently integrated Europe, can in the end, even mean 'less Europe' - if after a critical appraisal, tasks and responsibilities are unbundled and clearly assigned. The EU could concentrate its tasks to the Single Market; trade; financial markets and currency; climate; environment and energy; as well as foreign- and security- policy. In the areas, therefore, where long-term success can only be negotiated on the European level.

He again laid out his view on treaty change, arguing that in order to strengthen the eurozone, it is "unavoidable in the medium term."

However, on the EU's 'democratic deficit', it is less clear exactly what Schäuble has in mind. He argues that:

A cleverly integrated Europe would then, look something like a "multi-level democracy" - a complementary, interlocking system of democracies with a different range and scope of competences: a National-European double democracy. Then the citizens of our national democracies and European democracy would be level.

Fine, but it is the exact balance between the two that is so politically controversial - and it remains unclear how German policymakers intend to square the inbuilt tension between national democracy and European integration, particularly in the eurozone where this tension is greatest.

Anglo-German partnership on EU reform could prove crucial at the negotiating table

Die Welt's Economic Editor Tobias Kaiser has an opinion piece in today's paper entitled entitled “Stay with us, Brits”, in which he argues that:

“Berlin needs London as a partner in the fight for fiscal reason [in the EU].” 

Kaiser highlights that:

“Berlin and London have to put their ideas of Europe against the French coined version of European etatism... The openness of the European economy has to be guaranteed and the protectionist regulations and national rules – which still prevent the development of a genuinely free exchange of goods, people, and ideas within Europe – have to be dismantled.”

This is an argument we have been making for a while. In 2012, following the election of Francois Hollande as French President, Open Europe Director Mats Persson argued that:

"Hollande simply rubs the Germans up the wrong way. His spending rhetoric is an outright challenge to German Chancellor Angela Merkel’s vision of a euro firmly grounded in Prussian budget discipline."

"Therefore, though it won’t be easy, the scope for a new bargain between London and Berlin – based on Britain needing new terms of EU engagement if it is to remain inside, and Germany needing the UK’s quiet support for a more economically sustainable euro – is possibly greater than ever."

While Hollande's push against austerity has waned, the process of Anglo-German cooperation has gained pace - exemplified by the recent joint op-ed in the FT where George Osborne and Wolfgang Schäuble agreed on the need for safeguards for the single market in the face of tighter political and economic integration in the eurozone.

Kaiser's call for greater economic openness within the EU also echoes the argument in favour of greater services liberalisation by Die Zeit's London correspondent John F. Jungclausen, who cited Open Europe's report which found that removing barriers to cross-border services trade could alone produce a permanent increase to EU-wide GDP of up to 2.3% or €294bn.

It's good to see the process beginning to bear fruit and gain wider traction in the German media, particularly on the specific areas where reform is necessary. As we pointed out ahead of Chancellor Merkel's recent visit to the UK, there is scope for a wide ranging 'Anglo-German bargain' in areas such as EU migrants' access to benefits, greater powers for national parliaments, and the devolution of some EU back to the national or local level. According to a recent Open Europe/YouGov poll, an EU reform agenda built on these pillars would enjoy significant public support in both countries.

With all this in mind, now would seem the perfect time for the UK government to begin road-testing specific reforms in Germany and other countries. 

UK and Germany present united front in favour of EU reform

In a major coup for David Cameron, Chancellor George Osborne has penned a joint op-ed in the FT with his German opposite number Wolfgang Schäuble. Both argue for the need for EU reform (including services liberalisation) and for safeguards for non-eurozone states in the face of further eurozone integration - all areas of potential consensus we flagged up in our recent 'Anglo-German bargain' briefing.

On the acceptance of the different needs of non-euro and euro members, and therefore the need for safeguards, they say:

“As the euro area continues to integrate, it is important that countries outside the euro area are not at a systematic disadvantage in the EU. So future EU reform and treaty change must include reform of the governance framework to put euro area integration on a sound legal basis, and guarantee fairness for those EU countries inside the single market but outside the single currency.”

Getting explicit German support for this view and providing a united front on this issue is an important step forward for the UK and for Cameron's EU reform agenda. While Germany has previously hinted at willingness to support the UK on this issue, this is certainly a step up. It also brings Cameron closer to ticking off one of the key targets he recently put forward in what was probably the most important article nobody spotted. Open Europe has long argued that safeguards against further eurozone integration are crucial and that they will play a key role in determining the new set up and balance of the EU.

That being said, the UK government should not be complacent about where it now stands in terms of its reform agenda. While this represents progress, there is some way to go. This provides an important opportunity and a good base for the UK to begin testing specific reform proposals on other EU governments and electorates. After all, while Germany is the largest and possibly the most important partner to get on board, the UK also needs to convince the rest of the EU. While teaming up with Germany should broadly help on this front there is one constraint - not everyone buys into Germany's vision of the new eurozone with significant central oversight and limited share of liabilities. However, as the banking union shows, Germany has so far been adept at influencing the construction of new eurozone structures in its own image.

Possibly a more surprising inclusion is the joint support for services liberalisation, of which they say:

“We must complete the EU’s single market, especially in services, open up to international markets and conclude reforms to the euro area.”

Again, we've been advocating this for some time - we estimate that it could be worth up to €294bn for the EU's economy. Traditionally, Germany has been one of the staunchest obstacles to such service liberalisation, due to its many protected professions. As such gaining its public support is another big coup for Cameron and a positive step for the EU economy.

One final interesting point is noted by the FT:

"Mr Schäuble told Bruges’s College of Europe on Thursday that he wanted negotiations on a revised treaty to start straight after the European Parliament elections in May."

This is equally as important as all of the above for Cameron given that some of the biggest doubts around his push for EU reform and referendum have been on the time-frame of the negotiations. There is clear hope that discussions around treaty changes will begin in earnest after the elections (although in an ideal world they would have been part of an open and transparent debate within the elections). 

Overall the approach isn't perfect - it still speaks of a two-speed Europe, suggesting all member states are heading in the same direction, which is not the case - but it is a big step and an important one for Cameron. It is now vital that he seizes this opportunity to push a wider EU reform agenda.

Germany finally admits to a third Greek bailout, but what form might it take?

It seems the German government has finally publicly accepted what everyone already knew – that Greece will need some kind of further financial assistance after its second bailout programme expires at the end of 2014. German Finance Minister Wolfgang Schäuble told a CDU election rally yesterday:

"There will have to be another [bailout] programme in Greece," in order to help the country "get over the hill" of debt repayments it faces.

Despite attempts from both the German Chancellor Angela Merkel and German finance ministry spokesmen to row back from the comments and suggest they are not, in fact, a change in stance, the remarks seem to have stuck.

What form might the third bailout package take?

• According to the IMF, Greece's total funding gap up to the end of 2015 is around €11.1 billion (5.8% of GDP) – so this can be taken as a lower bound of the funding needed. Privatisation receipts (which have notoriously fallen short) are expected to reach €7.7 billion over the next three years. Further shortfalls here could push up funding needs.

• A further extension of maturities and reduction in interest rates on the official sector loans, as suggested by EU Economic and Monetary Affairs Commissioner Olli Rehn also seems likely. However, interest on loans from the EFSF - the eurozone's temporary bailout fund - are already at cost and payments have been deferred for ten years. The IMF is also unlikely to reduce its interest rate as this would amount to a form of debt restructuring, which the IMF refuses to engage in due to being the most senior creditor. This leaves only the eurozone's bilateral loans from the first Greek bailout, the interest on which has already been reduced to around 1.5% (well below most eurozone states' long-term borrowing costs). Therefore, scope for further reduction is limited, and the benefit it could provide would amount, at most, to a couple of billion spread over a long period, as we have previously noted.

• Another widely touted proposal is to use the leftover funds originally allocated for Greek bank recapitalisation. So far, according to the IMF, Greek banks have received €40.9 billion out of an allocated €50 billion. Although it seems the EFSF expects this to increase to around €48.2 billion. It is likely some additional buffer will be needed, given the pace of increase in bad loans in Greece, meaning the amount available is likely to be between €2bn and €4bn max.

• A final idea, reported by Süddeutsche Zeitung, is that EU structural funds could be able to provide some of this funding. It’s not clear exactly how this would happen and, as we’ve noted before, we're sceptical of the idea that there is lots of excess money floating around to be easily reallocated in the EU's structural fund programme. Given that the new EU budget headlines for 2014-2020 are set, it's not clear how much more money can be squeezed out for Greece. One option would be to adjust the 'co-financing rate' (the amount the Greek government contributes to each project to gain funding) but this has already been adjusted and provided little boost to the take up of funds, which remains well below target.

Lots of questions to be answered then about the size and format of what may be the trickiest Greek bailout to date, given the tough political constraints and the on-going (very tenuous) premise of debt sustainability. An important consideration, as Schäuble suggested, will be to get Greece over its funding hump in the next couple of years (data from Greek debt bulletins):

The final point to note is the continuing German aversion to further debt relief for Greece, something the IMF and nearly all private observers accept is necessary. Within Germany, this seems to be a result of the government 'learning its lesson' from the first Greek debt restructuring, which patently failed. However, the German government seems to be learning the wrong lesson for the wrong reasons – it was not that restructuring was a bad idea in itself, but simply that all such a large amount of debt was held by Greek banks that the ensuing recapitalisation and bailout negated any benefit.

The German government clearly remains loathe to discuss any such details, meaning a clear plan is unlikely to emerge until the end of the year. In the meantime, we can’t help but wonder how the Greek public will react to the prospect of another bailout with another set of conditions attached. Could the big unknown outside the eurozone begin to look attractive once again? Maybe, or maybe not - but it may well start to factor into their thinking at some point.

German Constitutional Court live blog: One of the most important cases in the Court's history?

The German Constitutional Court in Karlsruhe

The German Constitutional Court’s (GCC) hearings into the legality of the ECB’s actions to combat the eurozone crisis – and specifically the OMT bond buying programme – kicked off this morning. (See here for the background). In a front page leader, FAZ describes the case as one of the “most important” in the court’s history.

Public opinion in Germany is mixed, with a Forsa poll for Handelsblatt finding that 48% of Germans hope that the Court will put a stop to the OMT, while 31% believe that the complaint against the ECB is unjustified. As we noted in our flash anaylsis on the topic yesterday, the GCC can't actually stop the ECB. At worst, it could remove Germany from the ECB's bond buying programme and probably, therefore, from the eurozone itself. (A poorly phrased poll question, then, but a very telling result nonetheless).

With Schäuble, the German Finance Minister, and the ECB's positions already well known (that OMT is within the Central bank's mandate), we can safely say that the highlight of the day will come  from the opposing side, in testimony of Bundesbank President Jens Weidmann. In terms of their specific grievances, it will be the first time we will hear a detailed, public explanation of where the Bundesbank stands on this issue, while the tone of Weidmann's comments will also be interesting. Will there be any more Faust references we wonder?

Check our twitter feed for live updates from Karlsruhe throughout the day. We will also continue to update this blog as things develop.

17:45

Bundesbank President Jens Weidmann has now had his say - and again his points were very much as expected (his full statement is here but only in German for now).

• Warned that ECB OMT blurs the line between monetary and fiscal policy - this makes it more difficult to achieve price stability and spreads solvency risks amongst eurozone countries, but does so without any parliamentary or democratic approval.
• Pushed for a narrow interpretation of a central bank's primary mandate, with a complete focus on price stability.
• Suggested that the OMT does represent potential losses for taxpayers, arguing that if the ECB took on significant amounts of risky debt, it may face large a loss which it cannot absorb and may require aid from member states.
• Argued that even secondary market purchases can overturn the force of market discipline and undermine fiscal autonomy.
• Issued a warning over the interpretation of the real-risk premiums for bonds, which he suggested was very subjective and dependent on future policies.
• Accepted that the inflation outlook in the eurozone fits with price stability at the moment, but still expressed serious concern about comprising the ECB’s focus on this.

It seems to us that, of the two sides, Weidmann had the tougher case to make. Ultimately, as much of the above shows, he is forced to consider hypothetical scenarios and potential worst cases. These are undoubtedly risks that should be highlighted, but it does leave one feeling that his argument is slightly less clear cut than Asmussen’s.

Having heard the key testimony of both sides, we still expect the court to side with the ECB, but with some caveats (although how strict they will be is very much up in the air). Of course, this could still develop more tomorrow. 

16:20

Asmussen has now concluded his testimony and subsequent Q&A, and the ECB has also helpfully put a transcript on their website. Here are the key points he made:

• the OMT will have the ability to sell bonds as well as buy them, and it will not take them off the market permanently, unlike its forerunner the SMP (in fact Asmussen repeatedly highlighted the differences between the two);
• the OMT is pari passu (equal to) other creditors,
• the OMT seeks only to reduce unwarranted interest rate spikes and is not aimed at harmonising financing conditions of member states,
• the ECB would react if a country were to try to game the system by converting all its bond issues to a short maturity (of up to three years), but that in any case markets themselves would "see through and deny" such attempts,
• the only risks associated with the programme stem from countries operating "un-sound" policies, but that those states that fail to comply with the OMT's conditionality could be faced with the prospect of having to leave the eurozone.

The comments were more or less as expected. However, there are a couple of interesting points. First, the fact that the bonds purchased under the OMT will be judged at market value suggests that, if they are purchased and then decline in value, the ECB could be facing losses on its balance sheet. A tricky technical and political issue. Second, the point about 'un-sound' policies leaves us feeling slightly uneasy. Its clear that even with an ESM bailout programme, implementation may not be up-to-scratch. Meanwhile, it also highlights the clear link that would be established between ECB policies and the fiscal (and other) policy of national governments. This surely raises questions about the ECB's independence.

Asmussen also admitted that the policy did have de-facto practical limits given that it will only purchase short term debt, as reported over the weekend.

15:10

Handeslblatt reports that Philip Rösler, the German Minister for Trade and Vice Chancellor is coming under increasing pressure from his own FDP party to take a stand against the ECB, following the Handelsblatt/Forsa poll showing that almost 50% of Germans hope that Karlsruhe will stop the ECB’s OMT programme (despite this actual course of action not being possible, see blog intro above on this).

Frank Schäffler, the financial expert of the FDP parliamentary group, told Handelsblatt Online that "Working towards a market-economy is widespread among the followers of the FDP. Liberals know that prosperity cannot be printed from the ECB.”

The irony of clinging on to central bank independence, while using political pressure to change the course of the ECB is not lost on us - nor on Rösler it seems, who said: “We must not allow this course toward stability to be broken up through the the attempt to exert influence on the European Central Bank.”

13:55

These comments from ECB Executive Board member Yves Mersch seem to confirm our feelings that the ECB is trying to have it both ways over its refusal to publish the OMT documentation (see 13:30):

Mersch: "controlled uncertainty on the OMT is necessary"
— zerohedge (@zerohedge) June 11, 2013

13:40

Germany's new anti-euro party Alternative für Deutschland has just put out a press release citing Professor Joachim Starbatty - one of the original plaintiffs in the case and now one of AfD's top candidates in September's elections - warning that under the OMT, German taxpayers will be responsible for liabilities that are "no longer the responsibility of any government or parliament". The party is clearly hoping the publicity around the hearings will boost its poll ratings.

13:30

Asmussen is clearly channelling Draghi in his comments below. The ECB's continuing refusal to simply publish the legal documents relating to the OMT is at best strange and at worst downright obstructive. It does beg the question: what are they trying to hide? Maybe nothing, but at the very least it seems they are trying to have the best of both worlds. By refusing to reveal the exact terms and conditions, the ECB can try to address German concerns over the extent of the OMT (as we have seen them doing in the run up to this case) while also being able to continuously reassure markets that the scheme is in fact "unlimited".

Such a balancing act is tough to pull off and may add to confusion if it breaks down. Some transparency would be welcomed. It needs to happen at some point, who's to say it would be better revealing the legal documentation just when the OMT is being tapped, surely by definition that would be a period of crisis?

13:05

The ECB's Jörg Asmussen is up now making the point that the ECB would actually adopt a legal ordinance before any bonds were purchased:

#ECB's Asmussen: #OMT Documentation Ready For Publication When Needed. OMT Documentation Can Be Published Within Days
— Holger Zschaepitz (@Schuldensuehner) June 11, 2013

#ECB's Asmussen: #OMT Cannot Be Activated Before Publication Of Guidelines
— Holger Zschaepitz (@Schuldensuehner) June 11, 2013

11:15

German Finance Minister Wolfgang Schäuble has spoken, and as expected, he backed the ECB:

German FinMin Schäuble: #ECB Independence Gives It Wide Scope For Decision-Making
— Holger Zschaepitz (@Schuldensuehner) June 11, 2013

Schäuble tells court government sees no evidence that the ECB has overstepped the bounds of its mandate. #karlsruhe
— Michael Steen (@michaelsteen) June 11, 2013

German finance minister Schaeuble argues the court shouldn't even be considering the OMT case, as they've no jurisdiction there. #karlsruhe
— Jeff Black (@Jeffrey_Black) June 11, 2013

When ideology meets economic reality (part III): Germany squabbles over the Financial Transaction Tax

The Bundesbank, The Deutscher Aktieninstitute (DAI), and even EU civil servants from the 11 participating countries have all warned against the FTT in its current form.

Today saw yet another German voice raised again the tax – this time from the very party that is meant to be its greatest champion. Nils Schmid, Baden-Württemberg's Minister of Finance – from the German social democrats (SPD)— wrote a letter to German Finance Minister Wolfgang Schäuble condemning the FTT in its current form as “rubbish.” Ouch.

Schmid’s intervention, says that "If the financial transaction tax is implemented as is currently planned, initial estimates show that it is likely to have a serious impact on certain segments of the market (money and capital)." He then calls for a “proper configuration” of the FTT.

So why is this important? Twofold:  first, it shows that in light of the overwhelming evidence of the negative economic impact of the FTT in its current form, the support for the proposal is quickly evaporating.

This now extends to the German political parties that have strongly endorsed it. Remember, the FTT is one of the SPD’s main campaigning issues, and served as the party’s quid pro quo for accepting the EU fiscal treaty. Although Schmid caveated his position, saying that he is not opposed to the idea of a FTT in theory, the point has most definitely been made.

Secondly, the FTT controversy has legs to become battleground ahead of the German elections in September. It is an issue that may split politics, both, within the parties and on a national level.

Officially, Schmid’s letter was met with a standard diplomatic line from the German Finance Ministry – which says it is taking concerns raised by Schmid and German banks “seriously.” They won’t say so in public, but the German finance ministry was most likely nodding approvingly…

Meanwhile, deputy chairman of the FDP parliamentary group ,Volker Wissing, saw his opportunity to strike – and took it, saying that Schmid's letter shows with which "naivety" and "rose-tinted blindness", the SPD had driven the demand for a financial transaction tax.

So far the SPD have remained stumm on Schmid’s intervention. But watch this space. If influential figures within SPD are the latest to start make noises about this, then surely, the Commission’s proposal cannot stand?

Splits in Germany (and beyond) over banking union?

It’s been a week of 'splits' over Europe and it looks like another one may be emerging – although this time in Germany.

German Finance Minister Wolfgang Schäuble had an article in the FT arguing:

"While today’s EU treaties provide adequate foundation for the new supervisor and for a single resolution mechanism, they do not suffice to anchor beyond doubt a new and strong central resolution authority.

We should not make promises we cannot keep. The overly optimistic predictions about a single supervisor starting work as early as January 2013 cost the EU credibility.

A two-step approach could start with a resolution mechanism based on a network of national authorities as soon as the new supervisor is operational, the resolution directive has been adopted and the Basel III capital requirements are in place.

A banking union of sorts can thus be had without revising the treaties, including a single supervisor; harmonised rules on capital requirements, resolution and deposit guarantees; a resolution mechanism based on effective co-ordination between national authorities; and effective fiscal backstops, also including the European Stability Mechanism as last resort."

Essentially, pointing out that a full centralised banking union is some time away, post EU treaty change. This potentially has implications for the UK, as much of Schäuble's solution, with the exception of the common eurozone supervision, would apply to all 27 members - the question for non-eurozone countries, including the UK, is how they will be affected by the 'second stage' of his solution. On the other hand, treaty change, as we've noted before would potentially enable the UK to put forward its own amendments.

However, German ECB Executive Board Member Jörg Asmussen espoused a different view in comments to the German press this afternoon:

"It is the aim [of the banking union] to make the Eurozone more robust against banking crises with an orderly, cross-border resolution of systemically relevant banks without leaving the burden on the taxpayer or the central bank."

"We think this is best ensured by a common resolution regime, a joint resolution fund that is financed by banks' contributions and a common resolution scheme…The entire tool kit should be available along with the Single Supervisory Mechanism."

So, much stronger on the need for a clear centralised authority as soon as possible, preferably when the ECB takes on its supervisory role at the start of next year. This also seems to imply then that such a move could be done without changing the EU treaties.

To be honest this is not an entirely new position, it is something other members of the ECB have previously called for. Nevertheless, it represents a fairly significant split between two leading political voices in Germany over what is now the key policy for reforming the eurozone.

It's also worth noting that at a press conference earlier today the Spanish and Portuguese leaders both put forward a similar argument to that of Asmussen on the need for an immediate 'full' banking union. Meanwhile, Eurogroup Head Jeroen Dijsselbloem said that the issue of treaty change could be dealt with "later on" but admitted that "understandable questions" were being asked on this front.

We, as with all those following the crisis, wait with bated breath for German Chancellor Angela Merkel to declare which side she comes down on. So far she has managed to dodge taking any big eurozone decisions ahead September's election in Germany, but with key discussion on banking union coming up next month its not clear whether she can continue to do so on this one.

Has Germany really gone off the idea of EU treaty change? (Part II)

Some EU pundits have spent the last several months arguing that a change to the EU treaties is a non-starter. "Don't you know", they say with a high degree of confidence "the Germans have gone off it." And in any case, no one else wants it any way for fear of ratification problems, not least in France.

Charles Grant from the Centre for European Reform said last week that "the Germans have cooled on the idea of rewriting the treaties." Another observer on BBC Newsnight (not our guy of course) said as late as last Friday that "the German government isn't at all keen on EU treaty change in the short-term", which the studio discussion then picked up on.

It's is definitely the case that the appetite for EU treaty change across Europe is limited, and for that reason it'll be a challenge to achieve it. But as we've said repeatedly, it's absolutely 100% wrong to say that the Germans have gone off the idea of EU treaty change. As we stated in our briefing ahead of Cameron’s Europe speech in January:

“There are currently seven broad proposals floating around for more Eurozone integration – most of which need EU treaty changes to be fully completed...Germany, in particular, is nervous about ad hoc-arrangements lacking firm constitutional grounding.”

Here is the full list:

Crucially, this also includes current proposal for a banking union, which from a German point, sit uncomfortably with the EU treaties. A few weeks ago we noted,

"Those who say that Germany has 'gone off the idea' of Treaty change - in light of David Cameron's speech where he mentioned EU treaty change as an avenue for reform - clearly haven't quite appreciated the nature of the proposals floating around."

Well what do you know, as we reported in today’s press summary, at last week's crucial meeting of EU finance ministers, German Finance Minister Wolfgang Schäuble insisted that an EU Treaty revision is necessary to achieve a banking union, claiming that:

“We’ll only do this on a clear legal basis, because I don’t want risks in Karlsruhe.”

Somehow this announcement still managed to surprise people. But wasn't it always obvious? Anyone who is at all familiar with German history will understand why they're so keen to separate monetary policy from bank supervision. If keeping the two tasks with the ECB, such separation can only take place  if there's a rewriting of the EU treaties (so that the final say no longer rests with the ECB Governing Council). This also matters for non-eurozone countries as that guarantees them an equal say in the ECB supervision structure, and therefore makes them more likely to join (particularly Sweden and Denmark, which the Germans are keen on). Indeed, the Swedes - in a very brave moment - tried to push for just such a treaty change but dropped the idea. Further steps, such as a joint resolution fund, will also require treaty changes.

There are plenty of hurdles to fresh EU Treaty negotiations - some countries will want to avoid them like the plague - and even if the Germans can get them off the ground, the timing and scope (limited or full?), remains unclear. It is also still not fully clear whether the eurozone could circumvent the UK via an inter-governmental arrangement if the latter kicks up too much fuss.

But what's clear is that, in the land of ordnungspolitk, the idea of an EU treaty change is alive and well. So hör auf mit dem Blödsinn as the Germans would say.

No backing down: Germany comes out swinging over claims it is the neighbourhood bully

Given all the Germany-bashing over the last week, in the wake of the Cyprus bailout deal (some of it completely ridiculous), it's easy to forget that the Germans themselves are remarkably united over the agreement. In fact, the feeling is that Germany, collectively, just got a fair bit more assertive over its eurozone policy.

On Friday, before a new agreement was finally reached and with Cyprus’ euro membership on the line, German Chancellor Angela Merkel – reportedly in an angry mood - told MPs from her coalition parties that it was wrong for Cyprus to "test" Europe and that while she preferred to see to see Cyprus stay in the single currency but was prepared for an exit.

And with respect to anti-German sentiments, speaking to ZDF this morning, Finance Minister Wolfgang Schäuble bluntly stated that:

“It is always the case, also in the classroom: When you sometimes have better results, the others, who have difficulties, can be a bit jealous.” 

German Justice Minister Sabine Leutheusser-Schnarrenberger (FDP) called on EU leaders to show more solidarity with Germany, claiming that:

"I wish that that the individuals at the highest levels of the EU including the President of the Commission and the President of the Council also display solidarity with us and defend the Germans against unjust accusations".

Meanwhile the opposition SPD and Greens have said they will both vote to approve the deal. It is not just German politicians who are being increasingly assertive. In our daily monitoring of the German press, we've sensed a hardening of tone and rhetoric throughout the crisis, not least in response to the overtly anti-German tone of many of the anti-austerity protests in the south. Referring specifically to the Nazi-themed nature of the protests, Ulrich Clauß argues in Die Welt that:

“In terms of the endemic prevalence of corruption in government and administration and in close to all parties in their respective parliamentary spectrums, these countries rank alongside third-world dictatorships. On the whole we are talking about countries in which ‘good governance’ seems to be an alien concept… in terms of political culture, there is an extreme divide between North and South in Europe.”

Writing in FAZ, Klaus-Dieter Frankenberger argues that:

“The Cypriots like to see themselves as the victims. It is not however their European partners who are responsible for the mess they are in… In the crisis countries many blame their plight less on corrupt elites and bad policies but on the alleged lack of solidarity in the North for which read: neo-hegemonic Germany.”

Last week, following the Cypriot parliament’s rejection of the original bailout agreement, Bild columnist Hugo Müller-Vogg argued in a piece entitled “We’re the scapegoats” that:

“Politicians there have acted extremely irresponsibly. Now they are extremely brazen in their demands from those who have solidly managed their economies. Moreover, they insult those who are supposed to help them. Without German guarantees there would be no bailout fund. But of all things we Germans are being hit in the crisis countries not only criticism but even open hatred… If it was not an issue of Europe’s future, there would only be one appropriate response: deal with your own mess”.

Writing in Die Welt, Director of the Hamburg Institute of International Economics Thomas Straubhaar describes the Cypriot bailout deal as a “turning-point” in the eurozone crisis, arguing that:

“Up until now, the bankrupt countries have been able to use fear of a domino effect to extort Europe. That is now over because the strong eurozone countries have the better hand – and they should not be afraid to play it”.

The implications of a Germany more prepared to assert its viewpoint has huge implications for the future of the eurozone and the EU as a whole. Remember who holds the cheque book...

Merkel caught in the middle between the Bundesbank and the ECB

In her traditional news conference following the summer recess, German Chancellor Angela Merkel walked a fine line in questions about the eurozone crisis, having to maintain a delicate balancing act with regards to different elements within her governing coalition.

For starters, she has to contend with the increasingly fractious rhetoric from the CSU – the Bavarian sister party of her own CDU – on the eurozone (see here and here for examples). The latest example being Bavarian Prime Minister Horst Seehofer’s argument that the €190bn cap on German liability imposed by the German Constitutional Court in its ruling on the ESM and fiscal treaty last week should apply to the euro-rescue effort as whole, including the ECB’s new OMT bond purchasing programme. However Merkel has rejected this interpretation on the basis the two are not linked. Speaking earlier today, she told reporters that:

“If the ECB determines that monetary transmission has become difficult, then it must take measures to ensure price stability - it is not up to us to set it limits.” 

Seehofer later confirmed that “this is the only issue which we interpret somewhat differently than in Berlin”, adding that it was nonsensical for the Court to cap Germany’s liability at €190bn only for “it to be suddenly increased by many multiples through other means”.

On the other hand however, Merkel did not issue a statement of blanket support for the ECB’s actions, adding that Bundesbank President Jens Weidmann’s recent interventions – in which he has been fiercely critical of renewed ECB bond-buying were “understandable and always welcome”, a statement widely interpreted in Germany as a subtle rebuke of Finance Minister Wolfgang Schäuble’s comments in an interview with Frankfurter Allgemeinen Sonntagszeitung yesterday in which he criticised Weidmann for his public dissent, arguing that “I'm not sure that making this debate semi-public helps to build confidence in the [European] central bank.”

Merkel is in a tough position because, having invested so much in the euro-rescue, she cannot afford to oppose the ECB’s ‘big-bazooka’ strategy. At the same time however she cannot allow Weidmann – whose views are widely respected and shared by the German public – to become completely isolated for fear this would provoke a substantial domestic backlash.

How long Merkel will be able to keep her fractious coalition together on one hand while also keeping the German public – whose support for the EU and euro has hit an all-time low – onside remains to be seen, especially in the event of unforeseen developments such as Germany actually suffering direct losses on its loans to Greece and/or losses on ECB holdings of Greek debt.

The Karlsruhe factor, Part IV

Throughout the eurozone crisis, we have often highlighted the gap between the kind of ‘shock and awe’ decisions expected by financial markets, and what national democracies are able to deliver. Nowhere has this been more evident than in the on-going constitutional tug-of-war between the German government and the country’s Constitutional Court (see here, here and here for background). The latest chapter concerns a series of legal challenges against the ESM and fiscal treaty, on the basis that they violate the sovereign budgetary rights of the German Parliament.

The stakes are very high given that the Court could, in theory, strike down the best part of Merkel and Schäuble’s efforts over the past year. It is unlikely that the Court will do so given the ramifications, but at Tuesday’s public hearing, the judges (pictured in their traditional red robes) indicated that they would take their time before issuing a ruling; up to three months to decide on whether to issue a temporary injunction pending a full decision on constitutional compatibility early next year.

This delay is most unwelcome news for Merkel who is desperate to reassure financial markets and other political leaders that Germany is serious about the eurozone rescue, which is why she expended a lot of political capital in pushing the two treaties as a package measure through the German parliament in record quick time, and was angry that after all that German President Joachim Gauck refused to give his assent after the Court asked him to allow them time to consider their legality.

The problem is that the Court was specifically designed – by the British and the Americans no less - to counteract the concentration of power and rash decision making by other federal institutions, a sort of systemic circuit breaker. It is for this reason it is tucked away in sleepy Karlsruhe, the opposite end of the country to Berlin and previously Bonn.

The question of urgency vs caution has led to deep divisions not only within the German government but also the wider political and constitutional establishment. Ahead of the proceedings, Justice Minister Sabine Leutheusser-Schnarrenberger (FDP) said that:

“Government and politicians should stay out of this completely. The Constitutional Court does not need any advice... Judges are also aware of the importance that their decision will have on the economy.”

However, addressing the Court directly, Finance Minister Wolfgang Schäuble warned that:

“A considerable postponement of the ESM… could cause considerable further uncertainty on markets beyond Germany and a substantial loss of trust in the eurozone's ability to make necessary decisions in an appropriate timeframe”.

Meanwhile the Guardian reports that Chancellor Angela Merkel allegedly told a private meeting of her CDU party that the Court was “pushing the limits” of her patience, while Martin Schulz, the President of the European Parliament complained that some of the Court’s verdicts are "characterized by great ignorance”. Conversely, Bundesbank President Jens Wiedmann, also giving evidence, warned that “a quick ratification is no guarantee that the crisis will not escalate further".

The graphic below shows how Germany’s major political figures have found themselves at odds over the Court ruling, with figures from all parties adopting a range of positions on the issue:

The German media on the other hand have presented a broadly united front, with Die Welt noting that the Court’s eventual ruling will determine “How far European integration can go without damaging the democratic substance of Germany”. A leader in German tabloid Bild argues that “It is totally right that the constitutional judges take more time – after all, the question is whether Germany is overburdening itself financially. That would be a lot worse than short term turbulences on the financial markets”, while in centre-left broadsheet Süddeutsche Zeitung, Heribert Prantl argues that:

“Karlsruhe has to find the ways and means by which Europe can continue to be built without breaking the foundations of the constitutional settlement. The success of this search is existentially vital for Germany and the EU. It is more important than the fleeting applause of the so-called markets in return for a quick decision.”

While the Court, even in the opinion of some of the litigants, is not expected to torpedo the eurozone rescue at this stage (although they take a slightly more pessimistic view over on FT Alphaville), the red lines of the existing constitutional settlement are looming ahead, with most forms of debt pooling that many have called for - such as Eurobonds or a banking union - lying on the opposite side. As the debate over the future of the eurozone will continue to rumble on, expect further tension in the broadly consensual model of German politics between further European integration on one hand and preserving the current constitutional settlement on the other.

An intense Eurogroup meeting for Spain

As expected, yesterday's was an intense Eurogroup meeting for Spain, with several key issues on the table. Here's a summary of what happened and what was (or wasn't) decided:

• Eurozone finance ministers reached a "political agreement" over the Spanish bank bailout. The final amount of the rescue package has yet to be nailed down, although Dutch Finance Minister Jan Kees de Jager has suggested that the Spanish government could eventually go for the entire €100 billion pledged by the Eurogroup (which, as we have previously noted, may not be enough);

• For the moment, it has been decided that Spain will receive a first tranche of €30bn by the end of the month. Eurogroup chairman Jean-Claude Juncker told the press that this money would be held as a "contingency in case urgent needs" arise in the near future;

• The money will initially go through Spain's national bank restructuring fund (FROB) and will therefore count as additional public debt. Once the eurozone has its single banking supervisor - not earlier than next year, according to both German Finance Minister Wolfgang Schäuble and ECB Executive Board Member Jörg Asmussen - Spanish banks will be allowed to get funds directly from the eurozone's bailout funds, and the debt will be written off the government's balance sheets;

• The loans will have a maturity of up to 15 years, and 12.5 years on average, Juncker said. Spanish Economy Minister Luis de Guindos (in the picture with Juncker) has suggested that the interest rate "could be even lower" than the 3-4% widely reported in the Spanish media during the past few weeks;

• The conditions attached to the rescue package remain unclear, as the Memorandum of Understanding will only be signed at the next meeting of eurozone finance ministers on 20 July - i.e. after the Spanish bank bailout passes parliamentary votes in Germany, the Netherlands, Finland and others. However, the Spanish press reports that the conditions will almost certainly include tougher capital requirements for Spanish banks and the creation of a big 'bad bank' to house the troubled assets held by the Spanish banking sector;

• Eurozone finance ministers also agreed to give Spain one extra year to bring its deficit below 3% of GDP. The revised deficit targets are: 6.3% of GDP (instead of 5.3%) for 2012, 4.5% of GDP (instead of 3%) for 2013 and 2.8% of GDP in 2014. In return for the extra year, Spain is expected to stick to the recommendations made by the European Commission earlier this year - which include, among other things, a VAT increase and stricter control over regional spending (the latter is much easier said than done, as we noted here);

• Despite the Spanish government consistently stating the opposite, los hombres de negro (the men in black) from the European Commission will indeed travel to Madrid every three months to assess how things are getting on.   

• On a slightly separate note, Spain came out as the big loser in yesterday's assignment of top jobs in the eurozone - possibly unsurprisingly, since it was also holding out its hand for huge amounts of aid. Luxembourg's Yves Mersch has been nominated to replace Spain's José Manuel González-Páramo on the ECB Executive Board – making Spain the only big eurozone economy not to be represented on the six-man Board. Madrid also failed to have its candidate – Treasury official Belén Romana García – appointed as chairman of the ESM, the eurozone’s permanent bailout fund. The post is to be assigned to current EFSF chairman, Germany's Klaus Regling.

Once the Memorandum of Understanding is finalised and made public, it will be possible to make a more thorough assessment. For the moment, once again, markets do not seem to have been impressed by the agreement - the interest rate on Spain's ten-year bonds remains around 6.9% this morning, very close to the 7% threshold widely seen as unsustainable.

No, Germany has not blinked first over debt-pooling…

People have once again been getting rather excited over a media report today. This time it is an interview which German Finance Minister Wolfgang Schäuble gave to the WSJ in which he said:

"We are willing to go as far as we need to in order to get a sustainable agreement in Europe,"

The WSJ took this as such:

His comments indicate that Germany is more flexible than many observers in Europe think after Chancellor Angela Merkel told German lawmakers early this week that there would not be full mutualisation of European debt in her lifetime. German lawmakers who were present have said that Ms. Merkel's comment was made in jest and that media have exaggerated its significance. Mr. Schäuble's comments seem to support this view.

Now, we don’t dispute that Merkel likely made her comments mostly in jest and that people also read too deeply into them. But equally, Schäuble's comments don't mark a significant switch in the German position – not least because the German Finance Ministry has already denied that to be the case, but also because in the very same interview Schäuble also said:

"We have to be sure that a common fiscal policy would be irreversible and well-coordinated. There will be no jointly guaranteed bonds without a common fiscal policy."

"We cannot separate liability (for public debt) from the competence to decide on fiscal policy. This would be to ignore the most basic lessons of the crisis. As soon as we have a joint EU fiscal policy, we can consider joint liability—the sequencing is key."

That all sounds very par for the course in terms of the German government’s approach to debt pooling. The important part here is the sequencing. Germany has always said it will support further integration and even potentially some form of debt pooling, but only if it first gets strict budget rules and clearly enforced fiscal constraints to ensure any risk sharing is not taken advantage of. Note: that's 'see you in court' enforced - not the current half-baked fiscal rules.

Clearly, the kind of institutionalised budget discipline that the Germans have in mind is hugely difficult to achieve. Remember, Van Rompuy's proposal for fiscal and banking union was cut it in half before publications - at the behest of the French - precisely because it included too strong language on budget discipline and loss of sovereignty over spending decisions. EU leaders have consistently failed to institute binding budget rules - think the original Stability & Growth pact, the watered down fiscal treaty, missed Spanish targets (with Madrid failing to control spending even in its own regions) etc. etc. Therefore, as we pointed out in a recent briefing, we think that to actually get by the first step of Germany's vision of a more integrated Europe will be hugely challenging.

Furthermore, as we reported this morning, this sequencing is also one of the dividing points between the German and French governments. France wishes to see risk sharing and debt pooling as soon as possible with political union later – i.e. debt mutualisation now (either directly or through the ECB) with greater conditions and oversight later on. So although they do sound as if they agree on the ends – more Europe and shared commitments – France and Germany very much differ on how to get there and in what order.

We’d also note that in terms of the "willing to go as far as we need" comment, German ministers have said similar things before, i.e.:

"We need more Europe…We do not only need a currency union, we also need a so-called fiscal union - that is, more joint budget policy."

-          German Chancellor Angela Merkel, 7 June 2012

“It is small-minded to reduce Europe simply to questions of finance…We must have the ambition to do more than simply protect the status quo.”

-          German Finance Minister Wolfgang Schäuble, 17 May 2012

Additionally, as today’s leader in Handelsblatt shows, aptly supported by the poll in today’s FT, Germany is willing to support more Europe but not at any cost and especially not without the right conditions and controls.

In other words, this game of chicken (as it seems to have been termed), still has a long way to run.

Is the Bundesbank going soft?

Shock horror. According to Reuters Deutschland, an unnamed central banker close to Bundesbank President Jens Weidmann today said the following, in response to the wide rumours that the Bundesbank may be willing to accept higher inflation to help solve the eurozone crisis:

“By this it is meant [that with] a rate of inflation that is moderately above the target of the ECB which is just under 2 per cent...No one need be afraid of massive currency devaluation”. 

 Apparently, the belief is that the Bundesbank 'can live with' 2.5% or 2.6% inflation.  

This follows an interview with German Finance Minister Wolfgang Schäuble,  published by Focus over the weekend, in which he said thus:

“It is fine if German wages are currently increasing more sharply than in all other EU countries”. 

After many years of reforms, he said, Germany has done its homework and can afford higher collective wage settlements than other countries.

So is this a sign that Germany is starting to follow the advice of a whole host of Anglo-Saxon commentators who see higher inflation in Germany as vital if the euro is to survive? 

We wouldn't bet on it. When commentators talk about higher inflation, they have something much higher than 2.5% in mind (though some commentators may not realise that themselves) - this certainly doesn't seem high enough to encourage the re-balancing and evening-out of competitiveness which many believe the eurozone needs to survive in the long term. The media may be getting ahead of itself on this one.

Who's afraid of the big bad bailout fund?

Update - 12:10: Eurozone finance ministers have already reached an agreement and put out a statement. It's pretty much exactly as we expected, with all assigned funds being rolled into the headline lending volume to give the €800bn.

The fact remains though that, even combined, the funds will not be able to introduce more than €500bn in fresh lending. This was the aim all along. In fact, all eurozone finance ministers have done is correct a previous mistake which would have limited the combined lending capacity to €300bn (as originally the treaty essentially specified that only €500bn in loans could be outstanding at any one time). There should be no illusions that this changes almost nothing (we expect not even the markets which have been reacting to every piece of news will be moved much by this). One thing is for certain though this is a clear win for Germany.

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Eurozone finance ministers are meeting today, in what looks to be the most chilled get-together of this group in recent time. They’re set to sign off on an agreement that will see the combination of the eurozone’s temporary and permanent bailout funds, the EFSF and ESM. On paper, the funds have the potential to produce a combined firewall of €940bn. Still far too little if Italy and Spain went, but an impressive sum nonetheless. That is, on paper. In reality they won’t even come close to this.

In an interview with Bild this morning, German Finance Minister Wolfgang Schauble said he didn’t want to “unnerve markets with numbers”, but in a speech in Copenhagen he did just that, saying,

"We have 500 billion euros in fresh money available, together with the programs already agreed for Ireland, Portugal and the new program for Greece. It is about 800 billion (euros). I think it's enough."

Apparently, Schauble reached this number by adding €500bn from the ESM, €200bn from the EFSF, €56bn in bilateral loans to Greece and €60 billion from the third bailout fund, the European Financial Stability Mechanism (EFSM) – which is underwritten by all 27 member states via the EU budget. But much of this cash has already been spent, i.e. the EFSM only has €11bn left, and some of the other money can’t actually be lent out. In addition, the remaining €240bn in unused EFSF capacity will be held back for ‘exceptional circumstances’ until mid-2013.

As we’ve been reminded of time and again, the only thing that matters is effective lending capacity. The real amount of cash that is still available to back stop struggling states, should it come to that, is only around €500bn. Here’s the lending capacity math (courtesy of some excellent analysis by the WSJ):

• Mid-2012 – The ESM will be limited to €210bn (as it will only have €32bn in paid-in capital). Along with the €240bn in ‘exceptional’ funds, this gives a total potential lending of €450bn. (The money which is already out the door should be ignored)

• Mid-2013 – Following a second instalment of capital the ESM will be able to lend €420bn. The ‘exceptional’ funds will be wound down around this point.

• Mid-2014 – All ESM capital paid-in, reaches total lending capacity of €500bn.

(There is one caveat to these figures, in that the eurozone could decide to speed up the paying in of ESM capital if the funds were needed. However, this would likely face significant opposition from the likes of Germany and Finland, and is therefore most certainly a last resort).

So despite Schauble’s comment, euro finance ministers continue to throw various different numbers around, which bear few resemblances to reality. We also note that the French Finance Minister, François Baroin, yesterday floated an unfortunate analogy. He said,

"The bailout fund is a bit like the nuclear weapon in the military domain…It is not intended to be used but to act as a deterrent."

The problem here is that if it’s too big and terrible to ever be used, it’s likely that it won’t ever be used. Even jittery markets will be able to figure out that a large fund which would damage French and German credit ratings if ever extended will never be fully tapped. So clearly some circular logic at play. And let's not forget that it’s still far too small to save Italy and Spain should if worse come to worse.

But at least eurozone ministers can look forward to a quieter Friday than usual...

The Greek Crisis: Five Key Developments

The decision on the second Greek bailout has been put on ice until (at least) next Monday, but things are moving fast in and around Greece these days - so here are yesterday's five key developments in the Greek crisis:

• A new poll published by Greek magazine Epikaira confirmed that the Greek electorate is moving towards the extremes of the political spectrum. New Democracy - the centre-right party led by Antonis Samaras - is credited with 27.5% of votes, while former Greek Prime Minister George Papandreou's PASOK lags well behind with 11%. In total, the two 'mainstream' parties would therefore get 38.5% of votes. The Greek Communist Party, Democratic Left and the Radical Left Coalition (SYRIZA) are credited with a combined 43.5% of votes, but the first has ruled out entering a coalition with the other two hard-left parties. These results are clearly very significant, not least because they will give Germany, Finland and the Netherlands fresh impetus to argue that Greece's smaller parties should also provide written commitments to austerity. Unfortunately, as we point out in our latest briefing, at the moment it's quite hard to see any of these parties agreeing to such a request;

• PASOK's Michalis Chrysochoidis, Greek Minister for growth and competitiveness (definitely an unenviable post), told reporters in Frankfurt that his party is "in favour of an extension of the life of [Greek Prime Minister Lucas] Papademos’s government...Elections should take place by the end of the constitutional term in 2013." Incidentally, Germany, Finland and the Netherlands reportedly brought up the possibility of postponing the Greek elections during Wednesday's conference call of eurozone finance ministers;

• Greek President Carolos Papoulias' anti-Schäuble invective didn't go unnoticed in Germany. CDU MP Christian von Stetten yesterday said that, without the German Finance Minister, Greece would already have been bankrupt a long time ago. The Greek President's intervention, he went on, was "unthinkable" and "absurd". Most significantly, Mr von Stetten said that Papoulias' words would "certainly impact" on the Bundestag vote on whether to approve the second Greek bailout, due on 27 February;

• According to Die Welt, the ECB has started the announced swap of its €50 billion Greek government bond holdings for new Greek bonds. The ECB is swapping the bonds at their nominal value, meaning that it is making profits out of them. These profits will then be distributed via national central banks to eurozone governments, which will have to decide whether they want to return the money to Greece as part of the second Greek bailout. The swap will be reportedly completed by 20 February. We will expand on this specific point later;

• Separately, Schäuble is also said to have rejected the idea of providing Greece with a bridge loan to avoid the country defaulting on 20 March - when Greece needs to redeem €14.5 billion worth of its debt - and uphold the rest of the second Greek bailout until after the elections as a means to maintain pressure on Athens.

Lots of stuff going on, and not all is necessarily good news. As usual, if you want to stay on top of the eurozone crisis, we recommend that you check out the €uro-Zone section of our new website and keep following us on Twitter @OpenEurope.

Has Schäuble given up on Greece?

It is estimated that 80,000 took to the streets of Athens yesterday to vent their anger at the latest round of bailout austerity. Another 20,000 reportedly protested in Thessaloniki.

After days of talks, Greek MPs finally approved the latest round of measures required by the EC-ECB-IMF troika. The vote was carried by 199 in favour to 74 against. But the Coalition parties expelled 43 deputies for failing to back the bill.

Police said 150 shops were looted in the capital and 48 buildings set ablaze. Some 100 people - including 68 police - were wounded and 130 detained, a police official said this morning.

While condemning the violence, Prime Minister Lucas Papademos conceded yesterday that, "The full, timely and effective implementation of the program won't be easy. We are fully aware that the economic program means short-term sacrifices for the Greek people."

The problem is that "short-term sacrifices" is rather optimistic. Everyone recognises that Greece needs to reform, and no one could fail to be shocked by yesterday's scenes, but the Greek people also need to be offered some hope of a brighter future. Given that the plan for Greece is for it, in 2020, to be in more or less in the shape that Italy is in now - and many would suggest Italy's situation is unsustainable in the long-term without its own dose of reforms - the structural change required in Greece looks to be well beyond what the country can take.

At the weekend, German Finance Minister Wolfgang Schäuble seemed to be reaching a similar conclusion. He said in an interview published in the Welt am Sonntag newspaper that, "The promises from Greece aren't enough for us any more. Greece needs to do its own homework to become competitive, whether that happens in conjunction with a new rescue programme or by another route that we actually don't want to take."

When asked if that other route meant Greece quitting the eurozone, Schäuble said: "That is all in the hands of the Greeks themselves. But even in the event [Greece leaves the eurozone], which almost no one assumes will happen, they will still remain part of Europe."

Today, FT Deutschland quotes sources involved in the bailout negotiations suggesting that Germany's position on Greece is hardening to such an extent that it would actually now rather see Greece default. "Germany confused everyone else" in the negotiations, complained one. The paper also suggests that observers in the CDU are noticing a rift between Schäuble and his Chancellor. "Schäuble supports the bankruptcy of Greece, Merkel wants to strictly avoid it," said a leading member.

However, it seems that some in the German government may finally be beginning to realise that they are flogging a dead horse.

You're On Candid Camera, Herr Schäuble

At yesterday's meeting of eurozone finance ministers, Portuguese TV channel TVI24 caught an exchange between a seemingly unaware German Finance Minister Wolfgang Schäuble and his equally unaware Portuguese counterpart Vítor Gaspar. Schäuble said,

"If in the end we need to make an adjustment to the [Portuguese bailout] programme, having taken large decisions about Greece...This is key. But then, if necessary, an adjustment of the Portuguese programme, we will be prepared."

Clearly code for extra bailout cash for Portugal. "That's much appreciated" replied a thankful Gaspar, prompting Schäuble to flag up an important caveat,

"Members of the German parliament and public opinion in Germany do not believe that our decisions are serious, because they don’t believe in our decisions on Greece.

Speaking after the meeting, Gaspar tried to play down speculation that Portugal will need a second bailout, and told reporters,

"When [Schäuble] mentioned the possibility to make Portugal’s [bailout] programme more flexible, he meant nothing more than what was repeated several times by eurozone heads of state and government: countries under a [bailout] programme, which are complying with their programmes, but due to reasons beyond their control may face difficulties in returning to the markets, can count on the willingness of their European partners to extend financial assistance if necessary under those conditions."

Not that convincing. If anything, Gaspar seemed to confirm what Goldman Sachs and BBVA have recently predicted: Portugal may not be able to return to the markets in 2013, and will therefore need an additional cash injection (€30-50 billion to cover its financing needs until 2015, according to Goldman Sachs).

And Schäuble wasn't the only one caught on camera yesterday. Expansión reports that Spanish Economy Minister Luis De Guindos was yesterday caught telling EU Economic and Monetary Affairs Commissioner, Olli Rehn, that Spain's planned labour market reforms will be “extremely aggressive, with great flexibility in collective negotiation and reduced compensation for dismissal.” Spanish unions aren't overwhelmed with joy today.

Looking at it from the bright side, there's now at least some transparency in the eurozone crisis...