Germany Steps Up Euro Zone Backing
Germany is showing more commitment to the resolution of the euro zone debt crisis, and is likely to expect even greater influence on the fiscal discipline of its neighbors in return, analysts told CNBC.
The European Central Bank announced on Sunday that it would begin to buy up Spanish and Italian debt in the secondary market in a bid to repair confidence in the euro zone.
The ECB has previously resisted further bond buying, but with Italy and Spain increasingly battling negative sentiment, and with Cyprus and Belgium apparently being pulled into the quagmire, as well as the collapsing global markets and a US debt downgrade, the bank seems to have felt compelled to act outside of its usual mandate.
The ECB issued a statement on Sunday welcoming fiscal reforms in Spain and Italy, and the support for a longer-term bond buying mechanism, the European Financial Stability Facility, by the French and German governments.
RBS chief European economist Jacques Cailloux, chief European economist at RBS, wrote in a note that the ECB is likely to buy around 2.5 billion euros ($3.6 billion) worth of bonds per day – 600 billion euros over the course of the year.
Italian and Spanish yields fell below 6 percent on Monday morning. German bund yields fell, as investors bet that Germany will carry the cost of the intervention.
This complex, where the stronger German economy carries the cost of intervention, is likely to be critical as the crisis response moves to its next stage, analysts told CNBC.
Steen Jakobsen, CIO at Saxo Bank, told CNBC that the crisis has allowed policymakers to focus on the underlying debt issues in the euro area.
"It is only in times of absolute distress that politicians are able to conduct themselves properly in terms of doing something about deficit. We have seen clearly that Berlusconi has come to the table in Italy, we've seen clearly that the EU Commission all of a sudden finds they have a responsibility to be more forefront. What we need now, and what is all important over the next 48 hours and over the next two to three years is that Germany commits fully politically to this process," Jakobsen said. "They did reiterate yesterday that commitment in wording, now we need to see some practical backing for it."
While German Chancellor Angela Merkel is likely to be able to get the domestic support she needs, it will be at a significant political cost, Jakobsen said.
There is also, analysts have noted, an apparent divergence of opinion between politicians in Berlin and the Bundesbank. Jens Weiderman, the Bundesbank's president, is reported to have opposed the resumption of the ECB's bond buying program.
Holger Schmieding, chief economist at Berenberg Bank, told CNBC that the politics was typified by robust discussion, but would likely end with Germany imposing more of its fiscal discipline on weaker euro zone members.
"This is, in Berlin, a very noisy process and it does carry significant risks. But so far, the process has always gone in this way, that with the crisis escalating, Germany was always ready to do more, but it always asked for a price," Schmieding said.
"What we will likely see is Germany backing the ECB and exacting another price from its partners. The price, in the sense of saying: 'you, Italy, and to a certain extent you, France, just have to do more austerity. I think you will hear much more about this German idea of having a more balanced budget amendment, close to the German 'Schuldenbremse' -- which is the balanced budget amendment - in countries across the euro zone, not just in Germany."