EU and Euro Are Still Not Out of the Woods

Germany's high court ruling saves face for Chancellor Merkl, but it isn't a resounding endorsement either.  It's unclear to an English speaking reader what the basis was for rejecting the constitutionality of the German government committing taxpayer funds to sovereign bailouts.  However, it does require that the Chancellor seek approval from the parliamentary budget committee before taking on future obligations, as opposed to the current practice of notice after the fact.

Again, there is an element of pragmatism in the high court's directive to go to the budget committee as opposed to the full parliament, which would have meant gridlock and political grandstanding.  In reflecting this pragmatism, the German courts seem vastly more enlightened than our own.

What happens from here?  The pressure will continue to mount.  Finland's demand for its own dedicated collateral in exchange for participating in the current bailout commitment is still on the table, unresolved.  If the Finns back down, they face political issues at home, while if they are accommodated, the flood gates open and the deal falls apart.  The weaker players are currently being subsidized by the ECB's buying of their bonds, supposedly to keep credit spreads narrower than they otherwise would be.

What awaits them down the road?  Greater austerity and fiscal oversight from the EU.   For Italy, this seems like an unacceptable bargain for the shrewd Italian P.M. Berlusconi, whose balanced budget bill requiring a constitutional amendment is on the table today.

There is simply no significant sentiment behind fiscal harmonization in the EU, and any leader from a peripheral country who dared to back the concept would probably be ousted in a snap election.  Failing fiscal harmonization, the ultimate owner of systemic risk in the Eurozone would be Germany.  Do they want to be in that position?  I think not.  Stay tuned.