Unlimited bailout?

Several euro states and the European Central Bank (ECB) are preparing to furnish the ESM, Europe's planned permanent bailout fund, with unlimited financial resources, the Süddeutsche Zeitung reported this week, citing unnamed European Union sources. The ESM will then be able to buy state bonds from indebted countries.

Until then, the plan is for the existing EFSF bailout fund to intervene in the bond market alongside the ECB, and buy Spanish and Italian state bonds in bulk, says economist Zsolt Darvas of Brussels-based economic think tank Bruegel. The EFSF is expected to be too small to reassure the markets in the long-term.

According to Darvas, that is why the ESM must be given the power to borrow money from the ECB. For that it will need a bank license, giving it potentially unlimited financial resources. "The intervention would then be much more credible," he told DW. "The ESM could borrow money from the ECB and buy more and more state bonds."

But that would not necessarily solve the problem. "A bank license alone would not be enough," said Darvas. "What the markets expect is a fundamental solution. They want to know how the eurozone will overcome the economic crisis." Buying bonds, in whatever form, would only be buying time, he warns. It would not be a long-term solution.

Breaking European law

But both the German government and the Bundesbank, Germany's central bank, have serious legal and political concerns about buying state bonds through the ECB or the ESM. Jürgen Stark, former ECB chief economist, thinks it would be a huge mistake for the ECB to take on state debts, even indirectly.

"In my opinion, this would be a clear violation of European law, because it would mean unlimited and indirect public financing through the ECB," Stark told German broadcaster Deutschlandfunk. "We are already bending European law to the breaking point, to put it mildly. A lot of legal experts are calling it collective violation. We have to draw a line, and we should stop going down this slippery slope." Stark gave up his post at the ECB in protest at the plans to buy state bonds.

Moment of truth

All eyes are now on Frankfurt, where the ECB board is meeting on Thursday. Cinzia Aldici, an economist at the Center for European Policy Studies in Brussels, is convinced that ECB President Mario Draghi's latest promises - "believe me, it will be enough," he said - have created huge expectations in the markets.

"It's very risky, because if the ECB doesn't deliver something substantial, the situation could get worse very quickly," she told DW. "A simple statement won't be enough. As far as the markets are concerned, the moment of truth has come."

Aldici admits that this crisis point has been predicted a few times before. But, she says, the prospect of an unlimited bailout fund has changed the situation.

On the other hand, transforming the ESM into a bank with unlimited possibilities will be a big challenge for German Chancellor Angela Merkel. Members of her own coalition government are against the idea, and it would certainly require new parliamentary votes. On top of this, the German Constitutional Court has said it will only decide on September 12 whether the ESM in its current form even conforms to the German constitution at all.