A Spanish-German Compromise?

As European officials worked a new “master plan” for the eurozone and the G7 prepared for “emergency talks” on the region Monday, debate between Spain and Germany simmered—yet compromise appeared to take shape:

Spain’s PP Says Bailout Not Needed, Calls on EU for Support ... yet Berlin Wants Spain to Accept Bailout Money

Thus far, Spain remains able to issue debt on the open markets. On balance, auctions have gone ok, and through May the country met 56% of its planned 2012 issuance (nearly all its maturing longer-term bonds have been addressed). However, Spain now needs an additional €19 billion by October to recapitalize Bankia, and potentially more to backstop other banks—and as yields rise, some question whether Spain can secure these extra funds on its own.

Prime Minister Mariano Rajoy claims Spain doesn’t need a bailout, though he’d welcome a bit of help for banks. Over the weekend, in his larger call for an EU banking union, Rajoy suggested Spain would be willing to cede some fiscal sovereignty in exchange for banking support from the ECB or ESM. But according to Der Spiegel, German Chancellor Angela Merkel and her finance minister are pressuring Spain to accept a formal bailout. Thus, on Monday, Rajoy’s deputy reiterated his request—repeating that Spain doesn’t need a bailout, but asking that EU officials recognize Spain’s ongoing reform and debt-reduction progress.

It seems Rajoy’s trying to parry the German opposition by reminding EU officials that Spain isn’t Greece: Spain’s honored its debts, enacted tough public-sector cuts and labor market reforms without a firm mandate from the IMF, and its fiscal circumstances might be different if regional lenders hadn’t overextended themselves. This, he essentially argues, should merit a bit of flexibility to help Spain to continue securing open-market financing—if not a direct lifeline for banks, then more ECB bond purchases to help keep borrowing costs manageable. To get Germany’s blessing, he’s willing to transfer some powers from Madrid to Brussels in exchange.

He may find support from EU institutions. ECB Chief Mario Draghi and the European Council floated similar proposals, and the European Commission said extending ESM assistance to banks was a “serious possibility.” Thus far Germany’s opposed the necessary treaty modifications, but German resistance may be symbolic. Publicly, Merkel has taken a hard line on the periphery, likely to curry favor with German voters in next year’s election. But offline, she seems somewhat willing to compromise.

One German official told The Wall Street Journal Germany may support aiding EU banks provided member states are “prepared to give up sovereign rights to get European institutions more involved” —exactly what Rajoy offered. And Merkel herself met with European Commission Chief Jose Manuel Barroso to discuss an EU banking union on Monday, suggesting she’s philosophically aligned with most in Brussels. Though actual banking union is likely long ways off (if ever), near-term, Germany’s apparently softening stance suggests compromise with Spain isn’t out of the question, provided Spain accepts certain conditions (which Spain apparently does).

That’s just the latest example of Germany’s apparent willingness to compromise, using its fiscal strength as a bargaining chip in its quest for EU-wide free-market reforms. And more evidence emerged Monday, when Merkel shifted her stance on Eurobonds. Her spokesman claimed the Chancellor’s Eurobonds stance has morphed from a firm nein to a tentative yes, provided the eurozone moves “towards a stability union and towards greater political integration.” Presumably, that involves measures Merkel’s long championed: reforming labor markets, tax codes and social safety nets.

Whether other nations accept Merkel’s Eurobond bargain remains to be seen. Moreover, like a banking union, Eurobonds likely aren’t a near-term eurozone fix—as ever, there’s no silver bullet. But the broader concession suggests Germany remains a staunch European partner, willing to compromise as needed to preserve the euro.