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The Return of Politics (ctd.)



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BERLIN—Barely 12 hours after a reluctant European Central Bank breathed new life into the euro project, German politics dashed hopes that Europe would soon receive a bigger bulwark against a spreading government-debt crisis.

A spokesman for German Chancellor Angela Merkel, Christoph Steegmans, removed hopes of a more robust European Financial Stability Facility, saying the fund will stay as agreed at a July 21 European Union summit. “The EFSF will remain what it is, and keep the volume it had before July 21,” Mr. Steegmans said at a regular government press conference.The ECB Sunday made a landmark decision to expand its bond-buying program to include Italian and Spanish government debt, a step aimed at stopping a market sell-off that threatened to send their borrowing costs to unsustainable peaks. The ECB hesitated last week to take such a step, which greatly expands its role as an underwriter of government finances. But it was deemed critical to buy time until an improved bailout fund, the EFSF, could be ratified and implemented before October. The changes to the EFSF mandate would allow the fund to buy government bonds in the secondary market. The European Commission has asked for a massive increase in the EFSF’s current lending capacity of €440 billion ($628.23 billion) guaranteed by euro-zone governments. Market watchers said a new volume of up to €1.5 trillion or more might be needed to reassure investors that the fund can offset government solvency threats. The euro promptly lost much of the ground gained from the overnight ECB announcement as investors responded to German opposition to a massive build-up in the euro-zone’s defenses against debt contagion.

Behind Mr. Steegman’s simple statement are growing strains inside Ms. Merkel’s coalition government, which has rifted over how much German taxpayers can be asked to pay for safeguarding the euro.

One dissenter is Economy Minister Philipp Rösler, head of Ms. Merkel’s junior coalition partner, the pro-business Free Democratic Party. The party has been fighting to halt the erosion of its approval ratings.

“If you call into question those decisions only two weeks after [they've been taken], you achieve the exact opposite and unsettle markets,” Mr. Rösler said.

Another dissenter is equally dangerous for Ms. Merkel. Horst Seehofer, the Bavarian state premier and leader of the Christian Social Union, the Bavarian sister party of Ms. Merkel’s Christian Democrats, even rejected the purchase of more bonds by European institutions because this would mean the EU would take on that debt, with Germany having to pay the bulk of it in the end.



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