All Eyes on Germany This Wednesday

Wednesday could be the most pivotal day yet in deciding the fate of the Eurozone.

Yes we’ve had critical summits and last minute emergency meetings. But September 12 is being hailed by some as the day that could make or break the common currency as Germany’s constitutional court will announce whether or not the European Stability Mechanism, or permanent bail out fund of €700 billion, is legal according to German law. So far 14 of the 17 Eurozone members have ratified the treaty, with Estonia, Italy and Germany yet to put pen to paper.

It is the reaction in Germany however that will pull the most influence. As the economic powerhouse of Europe, Germany has already been criticised by George Soros, one of the world’s leading financiers, for failing to face the brunt of the crisis and has been warned that the Eurozone would face a long depression unless Germany are prepared to take on some of her neighbour’s debts. “Stay and lead, or quit the Euro” has been the message from Soros.

As the clock runs down on a rescue mission, it is becoming increasingly apparent that time is no longer on the side of the Eurozone. With Spain sizing up the possibility of needing a full state bail out, Prime Minister Mariano Rajoy has been clear in his intent to review all the conditions of seeking financial aid from the European Central Bank before arriving cap in hand. Nothing will be clear about the ECB’s recently announced bond buying plan until a rescue is requested, and how much this would mean signing over sovereignty to faceless bureaucrats in Brussels and at the IMF. Even if this were to happen, the Bundestag would then have to approve the terms of the agreement, and with recent backlash against the German Government from the media about the ECB’s proposals to buy Eurozone government debt, it is clear public opinion does not support the idea of Germany effectively bankrolling and underwriting the financial problems in other single currency member states.

Whereas in America, the banking crisis was quickly resolved after the collapse of Lehamn Brothers in 2008, Europe, due to its lack of federal unity, has been unable to find a weighty enough solution. On the same day as Germany decides on the legality of the ESM, the European Commission will announce proposals for a new Eurozone supervisor, an offshoot of the ECB that will regulate some 6,000 banks. Yet once again Germany is no longer playing ball. Whereas many see the creation of a supervisory institution as a concession to Germany’s demands that a watertight structure be brought in if German euros are to be used to underwrite Eurozone debt, Germany has now cast doubt on whether one central supervisor is enough and whether the ECB can supervise so many banks at onece. There has even been murmurings that some Germans suspect the French of trying to shift so much responsibility onto the ECB so as to deliberately render it impracticable. Meanwhile Britian, which houses the majorty of the EU’s financial industry, is of course outside the single currency and sceptical about any legislation or supervision that would shift power away from the City towards Brussels.

Even if a resolution is found, many still believe it is too late to make a real difference. The Eurozone is back in recession and unemployment has reached recird highs.

Also on Wednesday theDutch will go to the polls to decide on their future Government, with more vocal opposition to the country’s role in single currency bail outs than ever before. While it seems likely a pragmatic centrist government will be elected, there is no doubt that the ongoing Euro crisis has played a key role in many of the election campaigns with increasing public discontent over the handling of the Eurozone crisis and calls for the Netherlands to become  more assertive and sceptical about demands made in Brussels and by other Eurozone members.

Meanwhile in Greece the three party government cannot agree on austerity measyres designed to save almost €12 billion and ensure the next tranche of bail out funding from the IMF and EU. It is estimated that Greek debt is still at a whopping 166% of GDP. If the next chunk fo bail out money is withheld in the wake of insufficient reform, it is likely Greece would default, catapaulting the single currency back into crisis as markets would once again rally at the threat to the single currency, rocketing the cost of borrowing sky high and serving a heavy blow for Spain who is already teetering on the edge of insolvency.

According to Der Spiegel today Merkel’s rhetoric has somewhat changed on a Greek exit. Whereas before her and finance secretary Wolfgang Schäuble may have viewed Greece as the runt of the litter, it is reported she has now spoken out about the suffering of the Greek people in the wake of the crisis and implored that everything must be done to prevent a 'Grexit.'

This may of course also have something to do with the fact that in the wake of an exit, the €62billion owed by Greece to Germany would effectively have to be written off.

It will be interesting to see on Wednesday what the German Constitutional Court rules.