‘Trillion’ talk masks cautious compromise
Finance ministers agree to boost firewall.
Ministers seek alternatives to tax on financial trading
Framework for failing banks
Credit-rating plan on the ropes
So determined were eurozone finance ministers to use the magical ‘trillion’ word to describe the upgrade of the rescue fund that their official statement headlined the new total not in euros, but converted from euros to US dollars, to make it fit. And even the sum that they claimed in euros was artfully massaged.
“Altogether the euro area is mobilising an overall firewall of approximately €800 billion,” read the statement from the 17 finance ministers after their meeting in Copenhagen on Friday morning (30 March). That sounded impressive enough, and the word ‘trillion’ was duly flashed around the world on 24-hour news channels. For a moment, it seemed that a little bit of spin had persuaded everyone to believe that the eurozone had got its act together and established a buffer large enough to fight any renewed flare-up of the sovereign-debt crisis.
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Significant progress?
Twice in the space of a couple of minutes at the end of Friday’s talks, Olli Rehn, the European commissioner for economic and monetary affairs and the euro, said: “I see this as very significant and lasting.” Who was he trying to convince? “We are finally complementing the monetary union with a fully integrated economic union,” he added for good measure.
In reality, little has changed. Germany was determined not to contribute more to the rescue fund than it judged to be absolutely necessary, and consequently did not budge from its earlier careful stance. The truth about the firewall is therefore a lot less impressive than the hyperbole. Of the $1 trillion, or €800bn, some €300bn is either already spent or already committed. The decision taken on Friday means that, instead of €200bn of the committed money eating into the European Stability Mechanism’s €500bn total (the rest of that €300bn is made up of bilateral loans), it will be kept separate, permitting the ESM to retain an actual capacity of €500bn.
But then, throughout this crisis, the eurozone’s leadership has not been very good at taking decisive action until the financial markets put a gun to their heads. The current relative calm of the bond markets (despite the reminder that problems can explode again at any moment, as shown by the spike in Spain’s borrowing costs over the past fortnight) has given politicians a sense of leisure about the need for drastic action. Or, as Carsten Brzeski, ING bank’s senior economist, put it, it was the “classic European compromise”. Others, less diplomatically, might describe it as the classic German victory.
Friday’s decision was the least ambitious of the three options that had been put forward prior to the meeting. The most far-reaching approach had been to increase the lending capacity to €940bn. It ended up a long way short of that. The successive affirmations from so many of the eurozone’s finance ministers and officials before, during and after the meeting that they had definitely not allowed complacency to set in left the sneaking suspicion that, perhaps, complacency has indeed set in.
It should not. Reports presented to the finance ministers in Copenhagen made it clear why. One, prepared by the European Commission’s economic and financial affairs directorate-general, stated in simple terms: “the crisis is not over.” Another, from finance officials, talked of debt contagion returning “at very short notice”.
Fact File
Building up the firewall
The European Stability Mechanism (ESM)
To come into force on 1 July. As agreed in October 2011, its lending capacity will be €500 billion. This is the only unused portion of the official firewall total. It will be built up in five instalments, the last of which will be paid in during the first half of 2014.
Sub-total: €500bn
European Financial Stability Facility (EFSF)
Previously, the lending capacity of the temporary EFSF was €440bn.
So far, €200bn has been committed to the bail-out programmes of Greece, Ireland and Portugal. This is the amount added to the official firewall total.
The uncommitted €240bn will not be added to the ESM, which had been the preferred option of the European Commission. Until the ESM reaches its €500bn level, the uncommitted EFSF funds will be used to top it up so that €500bn is available immediately.
Sub-total: €200bn
Other funding – European Financial Stabilisation Mechanism (EFSM) and bilateral loans used for the first Greek bail-out
These two separate funding streams, the €49bn already paid from the EFSM (money from all EU members) and €53bn from other bilateral loans for Greece, have been added to the official firewall total, again despite already having been used.
Sub-total: €102bn
Total: €802bn (of which €500bn is uncommitted)
According to Jörg Asmussen, a member of the European Central Bank’s executive board: “Recent developments on the financial markets confirm that there is indeed no need for complacency on the issue of establishing euro-area firewalls as one element of our crisis-management tools.”
The whole point of the creative stretching of the figures is to convince the other members of the G20 group of rich and emerging countries that the eurozone is serious about putting its own house in order – in order to persuade the rest of the world to bolster the International Monetary Fund’s coffers. That would, in turn, allow the IMF to increase its own support for the eurozone.
A decision will be taken when the G20, World Bank and IMF meet on 20-22 April. Asmussen said: “We Europeans can travel to the [World] Bank and the [International Monetary] Fund having done our homework on European firewalls and this then can be complemented by the global firewalls of the IMF resources.”
It remains to be seen whether the rest of the world’s leaders consider the firewall increase to be as significant as they demanded, or whether they conclude that complacency has won the day.
In many ways, the mood of this meeting suggested that finance ministers are getting back to a pre-crisis business-as-usual frame of mind. That could be the greatest danger, since the eurozone is now entering recession, austerity measures are truly starting to bite, and unemployment is rocketing.