Spain and Italy confirmed their decision not to accept the offer of the European Central Bank, made in September, during interviews earlier today.
Both Mr. Rajoy, Spanish Prime Minister, and Mr. Monti, Italian Prime Minister, insisted that their respective countries would not request a bailout from the ECB, a plan Mr. Draghi had proposed to both as President of the ECB back in early September this year.
Their reluctance to ask for or accept a bailout from the ECB is based on the additional scrutiny of their national finances and deficits that both would be subjected to if a bailout would be agreed upon.
Such open and public records of public finances could negatively impact investors’ confidence in Spanish and Italian government bonds and would put upward pressure on yields which would increase the borrowing costs, an event that would put extra burden on two Eurozone members who already have to pay a premium versus other Eurobonds such as German Bunds.
The second reason for their joint public statement is their disagreement over the appointment of a European “super commissioner” who would have the power to intervene in national budgets if a member would break the deficit rules.
Mr. Draghi showed his support for the creation of a budget czar last week during an interview with the German magazine Der Spiegel.
The idea of such a new European position is the brainchild of Mr. Schaeuble, German Finance Minister, but has met some opposition so far, including Mr. Hollande, French President, and Mr. Cameron, UK Prime Minister.
The idea that individual European Union members would be subject to sovereign debt and budget scrutiny by an appointed budget czar has always been a sensitive topic of behind-the-door meetings and finds deep roots in members’ pride and protection of sovereignty and independence even though 27 countries joined the European Union a long time ago.
The creation of a fiscal and banking union and the adoption thereof in the next EU meeting in December is more likely than the unanimous agreement of all 27 EU members on the creation and appointment of a budget czar.
Such a proposal would entail a major change of the European Union Treaty or Treaties and would have to be ratified by all members in order to go into effect.
The latter is not expected to happen any time soon given that Mr. Cameron seems to prefer leaving the EU all together rather than submitting to more EU control and less sovereignty.
The UK is the largest EU member that is not a member of the Eurozone and also has veto power within the European Union.
Ultimately both Spain and Italy will need some sort of financial help but such may come from a direct recapitalization of their weak banks through the European Stability Mechanism (ESM) when such powers are being handed over.
The only dispute left in this case is whether or not Germany wins the battle with France and the ESM direct recapitalization only applies to members that currently do not benefit from a Troika bailout.
In the latter case both Spain and Italy are making a smart move by postponing any ECB rescue or bailout until the German-led ESM is in place and funds are available without the extra scrutiny and without the burden of carrying any loans on their country’s balance sheet.
Written by Nick Doms © 2012, all rights reserved
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