Despite the summit agreement, it will be a while before the ESM is authorized to buy Italian bonds. Germany still holds the key.


On Friday Angela Merkel got the Bundestag approval she was seeking. Germany approved the Fiscal Compact and the ESM. Germany views the Fiscal Compact as a way to enforce austerity in the periphery countries.

FT: – … the Bundestag passed the fiscal compact with 491 of 608 votes cast and the ESM with 493 of 604 votes, giving Ms Merkel a comfortable two-thirds majority which she needed for passage of each bill.

This vote was already planned and had nothing to do with the summit. But Merkel had to defend her decision to concede on direct bank bailouts and the use of the ESM to buy sovereign paper. Her argument is that the ESM has by no means been given a blanket bailout authority.

FT: – “There will be conditionality,” she added. A country such as Italy would have to apply for market intervention and sign a memorandum of understanding based on the European Commission’s recommendations before bond-buying would be approved in the primary market.

It basically means that nations will sill need to apply for a bailout just as they had to do prior to the summit. The stigma associated with the process will still be there. The difference is that the mechanism for such bailouts would assure a (supposedly) rapid approval and a direct response. But the Germans can still “veto” potential actions by the ESM going forward.

And Germany’s unease with the summit agreement is already visible. The opposition politicians are unhappy about both the direct bank bailouts and the sovereign paper purchases.

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