The German Constitutional Court approved the eurozone's permanent bailout fund. Through the new fund and potential European Central Bank intervention, the eurozone's survival is ensured for 2012. However, the eurozone's difficulties to agree to institutional reforms required to overcome the crisis will persist and prolong Europe's struggle.
A week ago, financial markets responded positively after the European Central Bank announced it would suppress borrowing costs in troubled countries. This will happen under certain conditions once the Eurozone's permanent bailout fund — the ESM — is operational.With the approval by the German Constitutional Court on Sept. 12, Germany as the last agreeing Eurozone country can formally ratify the ESM, which means nothing is in the way for the fund to become operational.
Spain will likely be the first country applying for limited aid to reduce its borrowing costs. Madrid has to roll over large amounts of debt until the end of the year and during the summer got under pressure as it's bond yields reached record levels. In the coming months Spain will also receive a first aid slice for its bank bailout. Greece will likely get its next bailout share approved during October. And Cyprus will become the fourth eurozone country to receive a regular bailout under supervision from the ECB, the European Commission and the International Monetary Fund. This list of countries shows that the financial aid to struggling eurozone countries will be important topics on the agenda of the numerous EU finance minister and head of state gatherings.
However, more important for the long-term outlook the political elite will be debating structural reforms of the eurozone.
On Sept. 12, the European Commission presented plans for a banking union that would give more supervisory power over Eurozone banks to the ECB. While all EU countries agree that tighter supervision of banks is necessary in order to avoid a wider financial crisis, there is disagreement over the reach of the new supervisor. It is likely that the ECB will take on a broader controlling role toward the end of next year, but negotiations among the 27 EU states, which each have to approve the plans, will delay implementation and weaken the current proposals.
The banking union is only one element of deeper Eurozone integration that will be debated in the coming months. Germany will push for stronger fiscal oversight and long-term political integration. The German credo is: no solidarity without supervision. The German chancellor, Angela Merkel, has to push for stricter control to calm her domestic voters and conservative allies after agreeing to numerous bailouts in the past and silently accepting further ECB intervention.
Survival of the eurozone hinges on collaboration between Germany and France. It will be important to watch whether Paris supports Berlin's integration plans.
The degree of sovereignty that countries are supposed to delegate to the European Union will be the most disputed issue over the coming months. All eurozone countries will debate how much sovereignty their nations are willing to give up for the sake of European integration.
Since the Europeans have the tools to contain the financial crisis in the short term, they will likely use them, kicking the long-term structural reforms down the road. However, as the economic crisis spreads throughout Europe, there is a growing risk that the voters will no longer support the current political elite and their piecemeal strategy, risking the rise of politicians that promise to unwind the European integration that has so far been achieved.