BERLIN (Reuters) - Germany’s push for an orderly insolvency process for indebted euro zone states suggests Berlin is assuming the worst: that one of its peers — most likely Greece — will default on its debt repayments.
But by pressing for a process to deal with a potential default, Chancellor Angela Merkel and her finance minister are showing they want to hold the euro zone together rather than eject deficit sinners.
Merkel, in the same speech in which she said “the euro is in danger”, called last week for the euro zone to develop “a process for an orderly state insolvency”.
Finance Minister Wolfgang Schaeuble — a veteran from former chancellor Helmut Kohl’s era and passionate defender of the euro zone — has also embraced the orderly insolvency idea publicly.
Their comments show they believe Europe’s $1 trillion safety net for the euro zone’s members is a stop-gap measure that will need supplementing with an overhaul of its fiscal architecture to uphold the currency area’s integrity in the long-term.
“Greece, in my view, will eventually default, and so Germany and France will have to find a way to let Athens default without bringing down the banking system,” said Josef Joffe, publisher-editor of respected German weekly Die Zeit.
“Orderly insolvency is not supposed to kick out Greece, but to keep it in,” he added.
The term ‘orderly insolvency’ picks up on an idea pitched earlier this year by Deutsche Bank chief economist Thomas Mayer, who raised the idea of ‘orderly default’ in a proposal he co-authored to create a European Monetary Fund (EMF).
Schaeuble borrowed Mayer’s EMF idea and is now pushing the insolvency concept as well. Stark though the term may sound, Schaeuble appears to be preparing a way to manage a potentially bankrupt euro zone state within the currency bloc rather than seeking to eject it.
Mayer said his focus in calling for a European Monetary Fund had been on managing the restructuring of over-indebted euro zone countries to safeguard against systemic effects, rather than them quitting the currency club.
Countries’ contributions to an EMF would be linked to their deficit and debt levels, under his proposal, with countries that breach the European Union’s fiscal rules paying in more.
Merkel has embraced the concept, telling parliament last week that with a process for orderly insolvency of euro zone countries “... we would create an important incentive for euro zone member states to keep their budgets in order”.
It would be good to set up an EMF soon, Mayer said, to supplement the euro zone safety net and a Greek aid package.
“As long as we don’t have a plan B, namely a plan for how to handle countries that are insolvent and not just suffering from a liquidity problem, the markets will doubt whether the policy approach is complete, whether it is convincing,” Mayer told Reuters.
Highlighting the economic challenges facing other euro zone states, the International Monetary Fund said on Monday Spain must make far-reaching reforms if it is to make its economy competitive again and prop up a fragile recovery.
Italy on Tuesday joined Greece, Spain and Portugal in enacting programs to slash budget deficits, trying to prevent contagion spreading from the Greek debt crisis.
To avoid any financial market trouble coming its way, France has also unveiled plans to ensure that tackling its ballooning deficit is enshrined in the French constitution, bringing France closer to Germany’s approach on state deficits.
“The performance of the French economy is somewhere between those of Germany and of the countries currently faced with doubts about fiscal sustainability,” said Niels Thygesen, professor of economics at the University of Copenhagen.
“Hence, more budgetary rigor, possibly boosted by anchoring it in the constitution, must be seen as a strategy to devise better protection against being lumped with the crisis-prone economies,” he added.
Germany has gained some traction with its push for tighter euro zone fiscal measures, with EU finance ministers on Friday backing a German call for tougher sanctions in future against states that flout the bloc’s budget rules.
Changes to the EU treaty may be needed to set up an EMF and Merkel believes these are unavoidable if the bloc wants to learn from the Greek debt crisis. But such changes may be hard to bring about.
European Commission President Jose Manuel Barroso told Germany’s Frankfurter Allgemeine Zeitung daily that Germany’s aim to modify the EU treaty is “naive” because it could prompt other member states to propose other changes.
British Prime Minister David Cameron said in Berlin last week that Britain “wouldn’t agree to any arrangements or treaty that drew us further into supporting the euro area”, stressing that this would require unanimous support of all 27 EU member states — “including the UK, which of course has a veto”.
“The hurdle in all talk of rebuilding fiscal discipline in the euro area is that at some point you will need a new treaty,” said Deutsche Bank economist Gilles Moec. “You have to renegotiate it with all 27 members of the EU and ... there were quite clear words from David Cameron last week.” (Editing by John Stonestreet/Ruth Pitchford)