Germany: A grand coalition may trouble employers and bankers

The very likely formation of a grand coalition government in Germany, led by the CDU-CSU Christian democrats, under Chancellor Angela Merkel and comprising the SPD socialists, will not be without tangible results in at least two crucial fronts. The wages of Germany’s hard working millions and the long overdue rearrangement of Eurozone’s banking system, are two prime fields that the socialists will bargain hard. There are already indications that this possible grand political compromise, will let down a lot of people. Already the lobby of the German industrialists issued a Press release yesterday, asking Merkel not to be soft in countering the socialists’ demands for large wage increases. They argued that the success of the country’s export machine may be compromised. In the financial filed there are strong indications also that the possible formation of a grand coalition government, may greatly affect the end arrangement to re-shape Eurozone’s banking system. Paying for failing banks The top leadership of SPD has made clear that they will not accept the re-launch of the European banking system to be based on European Stability Mechanism’s guarantees and loans, at least not exclusively. As things stand now, the Banking Union is completely stuck. The problem is who will pay for the cost of a possible resolution of failing Eurozone banks? The taxpayers through the ESM? The bankers themselves through the single resolution fund? Or both? To be noted that the largest part of ESM’s money come from the German taxpayer. What Mario Draghi, the President of the European Central Bank, said to European parliamentarians last Monday was characteristic. He told them that, “until the (single) resolution fund is fully financed, it should be able to borrow from other sources, including national ones, to ensure that properly-funded resolution (of banks) is an option from the start”. In this way Draghi proposes to divide the cost of the enactment of Eurozone’s Banking Union between the ESM and the member states, at least at the initial stage. Obviously the President of ECB meant that the resolution money to clear failing banks will come initially as loans from the ESM, plus contributions, under some financial form, from the member state or states, where the bank or banks conduct their business. The method of dividing the resolution cost of a failing bank between countries was followed in the case of the Belgian- French-Luxemburgish, Dexia Bank, with the three governments paying for it. However the country or the countries involved might be already over indebted and run the danger of going bust, if they undertake the full cost of a major bank resolution. The case of Cyprus was characteristic of that. According to Draghi for this danger to be addressed, the ESM should contribute a part of the bill, at least at the initial stage. The extend of the contribution will be probably decided ad hoc. Whatever the arrangements on the spot for a bank resolution, the ESM would get for sure its loans back from the Single Resolution Fund, which will be capitalised by a levy on all Eurozone’s lenders. There is one more point here that has to be clarified. Will the Resolution Fund be obliged to repay also the contributions made by governments? SPD may go for that. If the answer will be yes, then the banks will find themselves in a completely new environment, where ECB’s supervision and their obligation to pay in full for all their sins, will force them to change completely the way they are doing business. By the way, ECB announced yesterday that it has appointed the firm ‘Oliver Wyman’, to support the preparation and implementation of the comprehensive assessment of the significant Eurozone banks which will be directly supervised by the ECB. Socialists vs bankers Coming back to the German socialists it is more than certain that they will sell very dearly the few votes that Merkel needs in the Bundestag. Their previous experience in the 2005-2009 grand coalition government with the Christian democrats left a bitter taste, and they haven’t recovered yet. On top of that there might be occasions that the Merkel government might need more than a few votes to pass a controversial bill, some members of her party could reject. In any case the socialists have already left to be understood that their participation in the government should lead to visible policy changes, closer to their positions. The problem for Merkel is that she cannot easily deny the demands of the socialists, because there is no plan B for her to form a government. A coalition with the Greens or Die Linke is out of question for CDU/CSU. Then what? Hold a new Election? The Germans might punish severely Merkel, if she decides something like that. In view of all that Merkel has already stated that she is in favour of compromises and has come in contact with the SPD leadership. No doubt then that the SPD will insist to get the maximum on all fronts. Satisfactory wage increases will be their most important target. As for the bank resolution mechanism, they will reject outright the idea of the ESM lending heavily to the resolution fund. They negotiate then the extend to which national governments will contribute in eventual resolutions and will examine the possibility that the sovereigns get their money back partially or in total from the resolution fund and the bankers. In conclusion the SPD positions are very likely to shape the future of Germany and the European Union alike, in a much greater degree than their electoral score.