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Merkel Backs Draghi…Provisionally

Discussions relating to the aid pledges made by European Central Bank President Mario Draghi have resurfaced now that German Chancellor Angela Merkel is back from her summer hols.

Speculation has been rife over whether Germany will indeed back the ECB’s controversial decision to purchase government bonds, thereby lowering the astronomical borrowing costs of countries like Spain and Italy. During the ECB announcement, made on August 2nd, Draghi made it clear that such action would only be taken if the governments in need of assistance first used European bailout funds to buy bonds themselves whilst also adhering to strict conditions laid out by the ECB.

However, following yesterday’s joint press conference in Ottawa with Canadian Prime Minister Stephen Harper, Merkel told reporters that Germany is ‘in line’ with the ECB regarding the implementation of measures to protect the euro.

Merkel further stated: ‘Obviously time is pressing [when it comes to resolving the debt crisis] on many of these issues we feel we’re on the right track. [Policy makers for the euro-zone] feel committed to do everything we can to maintain the common currency.’

When pressed on the issue of sovereign bond-buying, something Germany has been vehemently against in the past, Merkel asserted that recent decisions made by the ECB ‘have made it clear that the European Central Bank is counting on political action in the form of conditionality as the precondition for a positive development of the euro.’ Italy and Spain have yet to provide a definitive response as to whether or not a request for aid will be forthcoming.

Now that she’s back from her jolly summer holidays it seems that everyone wants to play with Merkel. Her attempts to diplomatically battle the crisis begin next week. After hosting French President Francois Hollande, Merkel must welcome Greek Prime Minister Antonis Samaras as he arrives in Berlin for talks towards the close of the month. Samaras will then tag Italian Prime Minister Mario Monti and give him a turn at entering the German capital. Following this, on September 6th Merkel will be taking a little jaunt to Spain and engage in talks with Spanish Prime Minister Mariano Rajoy.

Pressure to act is raining in on all sides for the leader of the strongest European economy. With Germany being the largest single contributor to euro-zone bailouts Merkel must not only appease demands from ECB politicians to lead the euro defence charge but also deal with Greece’s calls to support slackening its austerity timetable whilst simultaneously tackling Spanish and Italian requests that debts be pooled to lower bond yields. These international concerns accompany a furore from home as her coalition partners insist on the refusal of further aid for Greece.

The euro-zone crisis is entering a new phase, and next month will be an important one for European leaders. Whilst international creditors deliver a report on Greek bailout target progress, the German Supreme Court will rule on the legality of the European permanent rescue fund. Draghi has also pledged that the specifics of the ECB’s bond-buying proposals will be cemented at some point in September. Whether Merkel is still ‘in line’ with the proposal once all the details are known remains to be seen.