“The best laid plans are laid to waste” so the saying goes, and according to the latest report from Nomura, plans by Germany and the European Central Bank (ECB) to stabilize and indeed salvage the euro zone are in serious jeopardy.
According to the latest report by the bank’s senior political analyst, Alistair Newton, German Chancellor Angela Merkel and the ECB President Mario Draghi are facing the immediate risk of popular and political discontent that could derail their plans to bring the debt crisis under control.
Newton believes the first challenge could come on September 12, when the German constitutional court is expected to vote on whether the European Stability Mechanism (ESM)- the proposed permanent euro zone bailout fund - breaks German law.
“We have previously pointed to the political risks which euro zone leaders face in September. We believe these will be heightened by on-going developments in Germany pointing to the coming autumn (fall) being the most difficult – and potentially decisive – period of the crisis to date,” Newton writes.
Newton believes the court won’t block the ESM, but the conditions placed on it could stymie Merkel’s “room for maneuver” and could damage her political future – and with that, the euro zone’s.
“The court will probably allow ratification of ESM to be finalized in September (although we remain more cautious about the fiscal compact),” the report states. “But the catch could be the conditionality which the court imposes –that is, a possible ceiling on total German support for the euro zone.”
Even if the ESM is ratified, Merkel’s re-election prospects could be seriously damaged as “bailout-fatigue” is spreading throughout the German populace and political ranks, with “explicit resistance” to euro zone “liabilities” growing among the German people and Merkel’s coalition government, the Nomura report says.
It warns that “market-unsettling political brinkmanship in Germany looks to us like an increasing risk” as German elections approach in 2013 and the opposition seeks to exploit rising resentment at Germany’s bailing out of imprudent economies.
“This, in turn, threatens ECB president Mario Draghi’s still-to-be-detailed plan of action as the central bank looks to strengthen its toolkit to save the euro – with the explicit approval of Ms Merkel.”
With the public in the Netherlands and Finland also expressing resentment at contributing funds to bail out southern euro zone countries, the report states that elections in the Netherlands on September 12 will give an indication on the future of the euro zone.