Monday

25th Oct 2021

EU opts for minimal increase on eurozone firewall

  • Schauble: 'It's convincing, it's sufficient' (Photo: Images_of_Money)

Finance ministers meeting in Copenhagen Friday (30 March) are set to agree on a German-led minimalistic increase in the eurozone's bail-out capacity, even as strikes in Spain and coalition disagreements in Italy could drive debt costs up to bail-out territory once more.

Speaking at a conference at Copenhagen University on Thursday evening, German finance minister Wolfgang Schauble referred to a total of €800 billion that the eurozone has and will make available "to fight contagion and protect its stability."

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"It's convincing, it's sufficient. We will have a similar protection by the International Monetary Fund as we got in the last two years and then I think we can be optimistic that it can work. It's a good solution and I think we should all get behind it," he said.

A break-down of the figure, however, shows that there is no new money committed to the new permanent bail-out fund - the European Stability Mechanism (ESM) to be set up in July and gradually reach a firepower of €500 billion over the next three years.

The only concession Berlin is willing to make is not to subtract from these €500 billion the existing programmes for Ireland, Portugal and Greece covered by the temporary European Financial Stability Facility (EFSF) and amounting to €200 billion.

In his calculation, Schauble also added the first Greek bail-out of €109 billion which was funded via bilateral loans in 2010, a few months before before the EFSF was set up.

One idea pushed by southern countries - to have the remaining €240 billion in loan guarantees in the EFSF not terminated once the ESM comes into force - is still being debated.

An EU official briefing journalists on Wednesday said there are two "camps." On the one side are the maximalists such as France and the southern countries wanting the EFSF to be kept alive as long as possible at its full capacity on top of the ESM.

But Germany, the Netherlands, Finland and Austria warn that such big financial commitments will backfire as markets will start wondering about the financial stability of the donors.

Asked about the possibility to extend EFSF's lifespan beyond next year, Schauble said that attention should focus on the ESM, "a stable mechanism," rather than the EFSF which was a "fragile construction."

"The sooner we have the stable construction in place, the better," he said, adding that Berlin had agreed to pay already this year €8.7 billion representing 40 percent of its €22 billion share to the cash fund in Luxembourg.

Unlike the EFSF loan guarantees, which show up in the countries' debt statistics once a bail-out is paid, the ESM is funded partly with cash - €80 billion - while the rest remains in national treasuries as "callable capital" not showing up in the debt statistics.

"Will it be an additional burden for the national treasuries? For sure. The question is how you manipulate the statistics. The EFSF already increased the debt-to-GDP ratio. ESM funding is just hiding the debt," Carsten Brzeski, chief economist at ING Bank told EUobserver.

Spanish troubles

Meanwhile Spain's budget cuts - required under the strengthened EU deficit rules - have been met with general strikes.

On Thursday, Spanish police clashed with demonstrators during a day of general strike in protest at the austerity measures and planned labour market reforms, with Prime Minister Mariano Rajoy to unveil a revised budget on Friday.

German finance minister Schauble said that Rajoy had promised to stick to the reforms regardless of the strikes he foresaw.

"We have to tell the Greek and Spanish people that we'll secure stability in the eurozone as a whole but that the condition is to regain competitiveness," he said.

Spain's difficult policy choices, along with first signs of disagreements in the Italian governing coalition over labour market, reforms spell troubles ahead, one EU source told this website.

"The problem is if Spain can't stick to the adjustment programme it just agreed to and Italy gets in trouble again - we've seen Monti already facing coalition problems over labour reforms and if France after the elections can't meet the 2013 deficit requirements, we're back to square one, markets will go mad again - perhaps even before summer."

Legal challenges may delay eurozone bail-out fund

Legal challenges in Germany, Ireland and Estonia, as well as political uncertainty in the Netherlands, may delay the setting up of a permanent eurozone bail-out fund at a time when Spain's economic woes require a strong firewall.

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