19 January 2012

Quentin Peel: Triple A judgement is mixed blessing for Berlin

By suggesting its eurozone partners are less credit-worthy, the agency (S&P) has underlined Germany's lonely role as the anchor of stability for 17-nation monetary union. That could yet prove very expensive, writes Peel in the FT.

In the immediate future, however, the downgrade may provide a bonus for Berlin and a salutary shock for Germany’s partners. Angela Merkel, German chancellor, wants agreement on reinforced rules of budget discipline by the end of the month, in an intergovernmental treaty. Now she is that much more likely to get it.

Ms Merkel needs that “fiscal compact”, which will require all 17 to write a “debt brake” – a binding commitment to a balanced budget – into their constitutions, or the nearest equivalent, for two reasons. She sees it as a big step towards a “fiscal union”, ensuring that no member of the eurozone will be allowed to accumulate unsustainable debts in the future. The chancellor also wants the treaty to convince the German Bundestag to vote in favour of a permanent €500 billion rescue fund, the European Stability Mechanism, just in case further bail-outs are needed.

Ms Merkel has already agreed to water down the ESM conditions, at least to strict German eyes. The treaty used to be littered with references to the involvement of private creditors in any future default. Germany wanted the reassurance that bondholders would share the cost of a eurozone rescue with the taxpayer.

In December, alarmed by the contagion caused by trying to negotiate a debt rescheduling with Greek bondholders, Ms Merkel agreed to drop her demand for such “private sector involvement” in future. At the insistence of the European Central Bank and the French government, she agreed that the Greek case would not be repeated.

It is a huge concession by Berlin. Indeed, Ms Merkel has gone further. She has also dropped her constant insistence on austerity as the sole route to recover market confidence, and agreed with her partners that reviving economic growth is also part of the answer.

At the moment, that commitment to growth is little more than rhetoric. Berlin rejects a sudden rush of deficit-financed spending. Berlin and Paris are looking at old ideas about structural reform and labour market flexibility, plus bench-marking best practice and targeting EU funds on growth and competitiveness.

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