Is the ESM in trouble in Germany - the political issue that could delay Fiscal Pact and the ESM isn't the Constitution Court case , but rather the issue of delay could arise from the Bundestag . And while Spain claim it doesn't need a bailout - it wants one for its banks !

http://euobserver.com/19/115915

BRUSSELS - Legal challenges in Germany, Ireland and Estonia, as well as political uncertainty in the Netherlands, may delay the setting up of a permanent eurozone bail-out fund at a time when Spain's economic woes require a strong firewall.

Citing democratic concerns, an Irish MP on Tuesday (17 April) lodged a constitutional complaint against the European treaties establishing the permanent eurozone bail-out fund - the European Stability Mechanism (ESM) - and the 'fiscal compact' on budget discipline required by Germany to agree to future bail-outs.

A similar complaint was lodged last month by the Estonian ombudsman, who questioned the 'emergency voting procedure' allowing big member states to take decisions even if smaller euro states object.

But even if Ireland and Estonia were to postpone ratification of the ESM treaty, the €500 billion strong bail-out fund could in theory still come into force on 1 July as planned, as the two countries contribute with less than 10 percent of the total capital - the threshold above which the ESM would be derailed.

However, if the German constitutional court accepts a legal challenge being prepared by the former justice minister - the calendar may still have to be re-drawn. Herta Daubler-Gmelin, justice minister in the first cabinet of Gerhard Schroeder said the ESM bailout fund “crossed a red line” and undermined the competences of national parliament to decide on national budgets.

“I’m convinced we will have a good chance with our case. I am all for more Europe, just not one determined by political elites,” she said Friday. Two other challenges are likely in Germany, from the Left Party and from a Bavarian MP who already challenged two EU treaties.

The Netherlands, which represents 5.7 percent of the ESM capital, is steering in troubled political waters, as the minority government has to count on the increasingly reluctant Social-Democratic opposition to back the two treaties in parliament.

EU officials in Brussels meanwhile are worried that Spain's raising borrowing costs are already a signal that markets have again started to lose confidence in the eurozone's ability to get its house in order. "The summer will be hot and it will start early," one source told this website.

Ten-year borrowing costs for Spain rose above six percent on Monday - for the first time since the European Central Bank started pumping €1 trillion worth of cheap loans into eurozone banks in November.

"In the current market discussions on Spain, it would be crucial to have the ESM as soon as possible," Carsten Brzeski, chief economist at ING told this website. He said a full-blown bail-out for Spain - which would eat up almost all ESM resources - is unlikely, but "bail-out light" recapitalising Spain's troubled banks "will happen."

As for the legal challenges and the political troubles, Brzeski said that "all depends on Karlsruhe" where the German Constitutional Court sits.

and for the timing of the Court challenge....

http://www.businessweek.com/news/2012-04-12/former-german-minister-to-challenge-eu-accords-rundschau-says

Former Justice Minister Herta Daeubler-Gmelin will file a complaint in Germany’s constitutional court against the European Stability Mechanism and the region’s fiscal pact, Frankfurter Rundschau reported, citing an interview with the Social Democrat.

Both the euro area’s financial backstop and the fiscal discipline accord violate the rights of the Bundestag, the lower house of parliament, the newspaper cited him as saying.

The justice minister under former Chancellor Gerhard Schroeder will file the complaint after the ratification of the ESM and the fiscal pact, scheduled for before the summer break starting in July, the newspaper said.

and to pass her Fiscal Stability Pact and the ESM , Merkel probably will have to persuade / satisfy the Social Dems....

http://www.businessweek.com/articles/2012-04-16/germanys-angela-merkel-tilts-toward-pro-bailout-party

Spain is where the flames are bursting out, but Germany is the country with fire engines in the garage. If you want to know whether Europe’s reemerging financial crisis can be quelled, look to Germany—specifically to the complex politics leading up to Chancellor Angela Merkel’s bid for reelection in 2013.

Despite Merkel’s recent flirtations with the pro-bailout left, don’t expect Germany to step up aid to Europe’s debtor nations significantly.

Leon Mangasarian and Tony Czuczka of Bloomberg News are reporting today that Merkel “may be preparing a rerun of her ‘grand coalition’ with the Social Democrats.” The Social Democratic Party (SPD for short) is a left-leaning group that favors issuing euro bonds as a way to knit Europe together more closely and rescue its weaker countries. To non-Germans, it seems a bit strange that Merkel would be tilting toward a party that’s pro-bailout, considering that opinion polls show Germans are disgusted by the amount of money they have already committed to helping Greece, Portugal, and Ireland and are in no mood to extend aid to bigger nations such as Spain and Italy.

To understand this better, I spoke today with German-born and -educated Markus Schomer, chief economist of Pinebridge Investments, a New York asset manager with $67 billion under management, about how he sees this developing. Here are some key points that came out:

• Merkel’s dalliance with the Social Democrats doesn’t mean she has changed her politics. Her right-leaning Christian Democratic Union and its Christian Socialist Union ally were in a governing coalition with the Social Democrats from 2005 to 2009, so this is nothing new.

• Merkel’s current partner, the right-leaning Free Democratic Party, is resolutely anti-bailout but hasn’t been able to translate that into popular support because of weak leadership. It’s at risk of falling below the 5 percent vote total a party needs to get seats in the Bundestag—which is why Merkel is searching for another partner.

• The Social Democrats, as Merkel’s junior partner, probably would not be able to get their way on euro bond issuance. They’re unlikely even to campaign on the theme, since being pro-Europe is a political loser. “You can’t run on being particularly pro-bailout,” Schomer says.

• Nevertheless, having the Social Democrats in the governing coalition would be good for the rest of Europe, because the SPD is a pro-spending party. If Germany spends more, it will be a stronger engine of growth, pulling in more imports from the rest of Europe. As Bloomberg News reports, Merkel is already leaning in that direction: Last month she agreed to a 6.3 percent pay raise for public-sector workers over the opposition of her Free Democrat partners.

and the Bundestag dilemma for Merkel.....

http://www.spiegel.de/international/germany/0,1518,825150,00.html

The German parliament has secured far-reaching rights to decide on the actions of the euro rescue fund. But several German politicians are warning that the Bundestag's determination to have its say could threaten efforts to save the euro, by hindering the fund's ability to act quickly. By SPIEGEL Staff

German Finance Minister Wolfgang Schäuble ultimately had to concede defeat. Last Friday, Schäuble, a member of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU), voted in favor of the massive euro-zone bailout packages whose sheer size makes most people's heads spin. "The euro area is mobilizing an overall firewall of approximately €800 billion, more than $1 trillion," the Euro Group, which consists of the euro-zone finance ministers, proudly announced.

There was a palpable sense of relief among all those attending the meeting of European Union finance ministers at Copenhagen's Bella Center. After all, they had resolved a protracted dispute. For months, the Germans had resisted the high firewalls that have been urged by the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF).

Now, Berlin has relented -- but this breakthrough could soon be reversed by further setbacks. There's a good chance that the beefed-up bailout fund won't work, despite its billions of euros in firepower.

Permanently Toothless

This time the problem won't be the German government but rather the German parliament, the Bundestag. Since the Bundestag insists on having a say on every minute detail involving the rescue fund, it's making life more difficult for the would-be euro rescuers. A number of instruments that the euro-zone governments only agreed to after fierce wrangling will thus probably remain permanently toothless, and possibly never be implemented.

Until now, the Bundestag has enjoyed co-determination rights that exceed virtually every other national parliament in Europe. Representatives of all political parties decided last week that these rights should now be extended. In the future, the Bundestag will have to give its approval to nearly all measures taken within the scope of the temporary euro-zone rescue fund, the European Financial Stability Facility (EFSF).

That is, of course, how things should work in a properly functioning democracy. But the situation also requires viable procedures and effective decision-making bodies -- and this is precisely where the problem lies. Veteran parliamentarians have warned that the new rules will be extremely difficult to implement, and the ECB too is alarmed. Central bank representatives have informed the German government that the reform threatens the effectiveness of the bailout packages and shifts the onus right back to the body that was actually supposed to be relieved of this burden: the ECB's governing council.

Indeed, the parliamentarians had originally organized the monitoring of the new fund largely in line with the monetary watchdog's needs. Regardless of whether the temporary rescue fund was to aid debt-stricken countries by purchasing sovereign bonds directly from governments on the so-called primary market, or on the stock exchanges (the secondary market), the decisions were to be largely monitored by a secret committee elected by the parliamentarians. That, at least, was what the Bundestag decided last September. The parliamentarians hoped that this would prevent the euro rescuers' plans from being prematurely disclosed and effectively nullified by speculators on the financial markets.

Getting the Whole Parliament Involved

But the idea of entrusting a significant proportion of the bailout decisions to a confidential group of experts contravened the rulings of Germany's Constitutional Court. In a number of earlier decisions, the court had made reference to the special "comprehensive budgetary responsibility of the Bundestag." This led to an inevitable development: In February, the court in Karlsruhe flatly rejected the parliamentarians' proposal. After in-depth hearings with a wide range of experts, the judges said that, aside from secondary market purchases, they saw no reason why decision-making powers should be limited to a secret small committee. The court expressly indicated that the parliamentary budgetary committee was far better suited as a representative of the Bundestag.

Vastly encouraged by the "comprehensive budgetary responsibility" that the court attributed to the Bundestag, the parliamentarians flouted the judges' advice and united across party lines to hammer out a new decision-making process that exceeds all sense of proportion. Instead of relying on the 41-member budgetary committee with its knowledgeable experts from all parties, it was decided that all 620 members of the Bundestag would directly decide on nearly every detail of the euro rescue fund. Only particularly sensitive purchases on the secondary market will be reserved for a special committee.

It was the left-leaning Social Democratic Party (SPD) and the Greens that spearheaded demands for maximum parliamentary participation, but for tactical reasons, Merkel's center-right coalition of the CDU, its Bavarian sister party, the Christian Social Union (CSU), and the pro-business Free Democratic Party (FDP) rapidly fell into line with the opposition. The government wanted to give the opposition something so that, in return, the SPD and Greens would support the European fiscal pact in the upcoming Bundestag vote. Merkel's administration is reliant on opposition help to get the fiscal pact through the Bundestag, as it has to be passed with a two-thirds majority.

The conservatives' floor leader Volker Kauder also basically agrees with the SPD's position. He, too, strongly favors a self-confident parliament. Furthermore, the government and the opposition have established a tradition of collectively deciding on important issues connected with saving the euro.

Sense of Unease

But the initial broad-based approval has been replaced by a growing sense of unease, particularly among the budgetary experts in Merkel's governing coalition. They also support the widest possible parliamentary participation, but they say that what has now been decided is hardly feasible. If the EFSF wants to make important decisions, in the future the entire Bundestag will have to regularly convene, in compliance with all legislative deadlines and regulations. For instance, at least 311 parliamentarians must be present in order for a decision to be valid.

"If we make the co-determination rights too complex, then ultimately only the ECB will be effective," argues Norbert Barthle, the CDU's budgetary policy spokesman in the Bundestag. "And then there will be no parliamentary control whatsoever."

Otto Fricke, Barthle's counterpart from the FDP, is also concerned: "I see a danger that we may be doing ourselves a disservice with our complicated construction of parliamentary participation in the EFSF." He says that if nearly all the fund's actions have to be debated in the parliament's full assembly, then the rescue fund will lose its effectiveness, especially when action is urgently needed.

One crucial problem with the new decision is that it also sets a precedent for the EFSF's successor, the European Stability Mechanism (ESM), which is due to come into operation in mid-2012. Last Thursday, Bundestag President Norbert Lammert wrote a memo on this topic confirming critics' worst fears. Lammert also wants to grant the Bundestag wide-ranging rights for the ESM. This would threaten the fund's effectiveness. The ESM was initially designed so that it could act quickly. All important decisions are made by a powerful governing council made up of members of the governments of the euro-zone states. If, however, the German representative constantly has to wait for the express approval of the entire Bundestag, the decision-making body would hardly function.

Following the German Example

To make matters worse, the ESM could be completely paralyzed if the German democratic approach becomes a precedent for other countries in the euro zone. Until now, it has mainly only been the Finnish parliament that has enjoyed co-determination rights similar to those of the Bundestag's.

But additional countries -- such as France -- could pattern themselves after the Germans. It seems to be only a matter of time before most national parliaments have a say in every step of the euro rescue.

"Of course it won't be easy if even more parliaments vote (on these issues)," says CDU Bundestag member Antje Tillmann. "But as German parliamentarians we can't assert rights that we don't grant to others."

The ECB is perhaps more disappointed than anyone with this development. It was hoping that the expanded firewall would take over the role of buying up sovereign bonds from crisis-hit countries. "It's important that the EFSF and ESM can intervene in crises by purchasing sovereign bonds on the primary and secondary markets," argues Jörg Asmussen, a member of the ECB executive board. He says this is the only way that the rescue funds can ease the burden on the central bank.

But now ECB sources say that the scope of action of the EFSF and the ESM has been drastically curtailed. They point out that both rescue funds will make hardly any interventions on the primary market in the future if the Bundestag as a whole has to decide whether German taxpayers' money should be used to help debt-ridden countries.

Need for a European Solution

Indeed, a far more basic lesson can be learned from the difficulties faced by Europe's rescue funds: Over the long term, a European problem cannot be resolved with national parliaments. "We need a rescue fund that is financed with European resources and democratically legitimized at this level," says Green Party financial expert Gerhard Schick.

Someday in the distant future, budgetary experts at the European Parliament, or a new body representing the euro-zone countries, will most likely decide on these issues.

and...

http://www.spiegel.de/international/europe/0,1518,828249,00.html

Spain Wants Billions For its Banks

AP

The stock market in Madrid: The Spanish government is having trouble attracting private financing.

A number of euro zone countries and senior officials at the European Central Bank would like to see the euro bailout fund changed so that it can provide direct aid to banks. This could help Spain, which has emerged in recent days as a new center of the euro crisis, but Germany is opposed.

With an eye on the growing banking crisis in southern Europe, particularly in Spain, an increasing number of goverments as well as senior represenatives of the European Central Bank are pleading for the European Union's temporary euro backstop fund to be used to provide financial institutions with direct assistance.

Sources familiar with the discussions told the Süddeutsche Zeitung that the parties would like to see the criteria used by the European Financial Stability Facility (EFSF) to allocate aid be relaxed to include financial institutions in the event they represent a greater problem than a country's government finances. So far, this aid has been paid to governments, which in turn provided some forms of assistance to beleagured banks.

Such a move would enable the temporary euro-zone rescue fund, the European Financial Stability Facility (EFSF), to directly transfer money to these banks, bypassing national governments.

Süddeutsche reports that the primary supporter for the calls is the Spanish government of Prime Minister Mariano Rajoy, which is having increasing difficulty raising money on the markets to fill the country's budget shortfall. Relaxing the rules could help ease the burden of the banking crisis his government faces and it would enable Spain's comparably low debt-to-GDP ratio to remain constant. In addition, it would mean that his country wouldn't be forced to implement strict savings and reform measures that are stipulated by the rescue fund in exchange for aid. As some observers have noted, austerity measures appear to be contributing to Spain's slide into recession.

Germany Rejects Bank Support

Some senior representatives of the European Central Bank are also backing the proposal because it would mean that the ECB would no longer be alone in its efforts to stabilize the European banking sector. In recent months, the ECB has lent commercial banks a total of more than €1 trillion in cheap money in an effort to stop a credit crunch last seen after the collapse of the Lehman Brothers investment bank in 2008.

But it would also entail a number of losers -- namely the most important EFSF donor countries, led by Germany, because they would no longer be able to force countries obtaining the aid to push through reforms. In the event of a bank's collapse, the money those countries had lent would also be lost.

proposal. "Spain doesn't need an aid program, and if it were to need one, then only under the known conditions," a government source told the newspaper.

Finance Minister Wolfgang Schäuble, for his part, has said he believes that Spain, Italy and Europe as a whole are headed down the right path in the financial crisis. But the government source speaking to the Süddeutsche pointed out another hitch: A direct payment of EFSF funds to private banks is not permissible under current legal provisions.