“Germany fears Italy, France would relax budget cuts if ECB intervenes markets”

The government of Mariano Rajoy seems unwilling to ask for a bailout. Is it because the risk premium has fallen in the last months?

That might be so, but Spain should not overdo it. Since September, short-term debt paper has been placed without difficulties, while long-term bond sales have been scarce. The markets are aware that the European Central Bank’s support covers up to three years, so from then on there is more resistance to buy Spanish debt.

Do you think the ECB’s goal would be to intervene to pull down the Spanish premium risk to 300-250 basis points?

I’d agree, although the ECB isn’t going to say it publicly any time soon. The International Monetary Fund estimates that the Spanish premium risk is up to 200 basis points higher than it should be merely due to euro zone problems, not to specific weaknesses of the Spanish economy.

Why has Germany refused to let the ECB directly buy debt?

Because the German government is of the opinion that Spain would then relax its adjustment plans, and Italy and France would follow suit, too. It may hurt, but this is the German position.

Berlin has changed its mind more than once, though…

Germany isn’t the only payer, but it’s the main one. Other net contributors like Finland and the Netherlands would introduce even tougher austerity. Then, there is the many power centres, the Bundestag, the Constitutional Courts, all of which limit the Chancellor’s decisions. And there are elections coming, as we all know.

Some commentators say Chancellor Angela Merkel has no further margin to impose more austerity.

Probably that is right. Merkel and [the German finance minister] Wolfgang Schäuble are pro-Europe. But let’s not forget the opinion polls, in which there is a consistent majority of German voters who oppose additional aid to troubled countries. It must be really hard to go against that sentiment.

Why should the ECB care so much about Germany’s opinion? There is a majority of governors in favour of more intervention.

If a euro country member defaults and the ECB assumes those losses, Germany would be on the front line because it owns 32 percent of it. This explains why Berlin and the Bundesbank are contrary to the central bank purchasing sovereign bonds.

Do you share their views?

I understand Angela Merkel because she is under the pressure of the German public opinion. She should explain the terrible consequences of a too nationalist position, though.

And in the meanwhile, the size of the state hasn’t been effectively reduced.

True. The network of public companies is far too large, and there still are too many duplicities between the central administration and the regions. Even if it weren’t for the savings, it would just set the ground for a better future. My impression is that this is what Brussels will require from Madrid, structural reforms instead of more budget cuts.