I've been asked why German Chancellor Angela Merkel is being dragged in front of the German parliament (the Bundestag) to give a speech on the EFSF and why the parliament is voting on it. Twice: first the budget committee will vote tomorrow, then the full Bundestag on Wednesday.
Didn't the German parliament approve an expansion of the EFSF at the end of September?
They did indeed, but the situation has changed: Merkel is now negotiating to leverage the EFSF.
The German parliament is concerned that leveraging the EFSF will increase the risk that the guarantees provided to the bond purchasers will have to be used.
They're right to be worried. Germany posted some $120 billion for the EFSF, and that certainly is at greater risk if leverage is used.
More importantly, dragging Merkel in front of the parliament is a wake-up call to the rest of the euro zone: Germany will not easily rubber-stamp future bailouts. It's going to get more rancorous from here on.
Here's where the big battle will be fought: will the ECB continuing buying sovereign bonds?
There are reports that conservative European politicans want a statement in tomorrow's EU Summit communique, expressing opposition to the ECB continuing its purchasing of bonds, particularly now that the EFSF expansion has been approved. But a firm decision has not been announced on how to spend the EFSF money, and even if one is announced it will likely take several weeks to implement any decision.
ECB support for Italian and Spanish bonds will likely be critical in this period.
That puts new ECB President Mario Draghi in the hot seat. He will chair his first ECB Governing Council meeting on November 3. This will happen right after the G20 meeting on November 2. He will confront two issues: 1) should interest rates be lowered, and 2) whether they should keep buying European debt.
Meanwhile, in Rome... UBS has a note out this morning titled "Berlusconi between a rock and a hard place." It's an apt analogy: the rock is the EU, which is demanding reform of the stagnant economy (they want some sign of progress by the EU Summit tomorrow!), particularly reforming pension and labor laws.
The hard place is his own coalition, particularly the Northern League, which is adamantly opposed to even raising the retirement age to 67 from 65. Why? Because the Northern League gets most of its support from the north of Italy. The northerners have paid the most into the pension system and so would be most affected by later retirement.
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