Wolfgang  Schäuble

Schäuble’s Finance Ministry working 24/7 on ‘safest way out’

German finance minister looking at direct help for banks.

German Finance Minister Wolfgang Schäuble no longer believes Greece can be saved from bankruptcy, and has convinced the Merkel Cabinet that future planning should now be the priority. This planning is examining in minute detail the ramifications of various ways to both present the insolvency to the markets, and explain what the fiscal practicalities of Greece’s future will be.

But already, the CDU big players are split by the question of whether Greece stays in or out of the eurozone. Hesse State Governor Volker Bouffier is close to the banking community in Frankfurt, as the financial centre of Europe comes under his jurisdiction. He, along with a sizeable group within the CDU, is urging Chancellor Angela Merkel to demand an immediate EU Treaty change to allow for Greek departure. But Finance Minister Schäuble is understood to prefer a scheme under which Greece would remain in the Union, and direct lines of credit help would be opened to ClubMed debtors cut off from the markets.

At the emergency crisis summit in late July, the European Financial Stability Facility (EFSF) was lined up to be given further power and more imaginative approaches to the supply of emergency credit lines to debtors in distress. The Schäuble plan would keep credit coming from the fund (for Italy and Spain) assuming those and other countries were unable to borrow following a Greek collapse.

But in an explosive new development, it seems that Herr Schäuble also wants another new ESFS instrument to be available to those banks unable to withstand the impact of Greek default. Given the source of the ESFS funds, this is simply a thinly disguised taxpayer bailout of the banks. But significantly, it supports the growing belief among analysts (especially in the light of Christine Lagarde’s recent recapitalisation demands) that several eurozone banks are in difficulties already.

The strategy being fleshed out by Wolfgang Schäuble must, of course, involve an increase in the ESFS’s size: to keep that many banks going as well as two to three sovereigns would require at the very least a quadrupling of the fund. This would in turn require the other eurozone members to contribute. One is left wondering which of those can still afford to get involved in such an expanded rescue operation: even France – an incontinent spender over the years – now admits that it too has a deficit growing alarmingly. It is the thought of Germany left alone in the Gary Cooper role that terrifies Volker Bouffier and those like him among the anti-Greek hawks in the Bundestag. They argue that a rapid exit of hopeless debtors from the eurozone is the cleanest way to contain the disaster.

Today, the ‘Troika’ inspection committee will report officially to eurocrats on Greek austerity progress. It is widely accepted that Greece is in default of the Bailout terms. Technically, the country is insolvent. Legally, the IMF thus cannot lend it any more money. But the banks aren’t strong enough to take the hit. And nobody dares ask the taxpayer to fork out again….which would, anyway, slow down the EU economy even more.

Hence the Schäuble strategy. It can’t work, because it’s too late for any of this now. The EU is heading for an almighty train wreck, and there are no brakes strong enough to stop it.