28th Sep 2020

Euro finance ministers set to finalise eurozone aid

  • Burst property sector bubbles have caused problems in several eurozone states (Photo: EU Commission)

Euro area finance ministers on Monday evening (7 June) are expected to finalise the principle component of last month's hastily agreed €750 billion eurozone support mechanism.

The meeting's chairman, Luxembourg Prime Minister Jean-Claude Juncker, says German opposition to elements of the €440 billion system of loan guarantees has been overcome, but the final agreement still needs to be signed.

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Funding under this element of the overall package will be made available through a special purpose vehicle, designed to issue debt to investors, and backed by eurozone states. Analysts say the move is similar to the long-touted 'eurobond' concept.

Portugal, Ireland, Italy, Greece and Spain - collectively knows by the unflattering PIIGS acronym - are frequently cited as among the eurozone's weakest economies and thus possible candidates for support.

Greece's immediate needs are covered by a separate €110 billion EU-IMF bail-out however, while Belgium's unstable political situation and government debt of 99 percent of GDP also places it in the list of potential contenders.

Spain's burst property bubble and unemployment of 20 percent, coupled with a large private sector debt and malfunctioning system of regional lenders has placed it in the eye of market turmoil.

"The questions about Spain are more on the medium-term growth model, rather than public sector debt levels," Jean Pisani-Ferry, director of the Brussels-based think-tank Bruegel, told this website.

Madrid's plans to shave €15 billion off the budget with public sector cuts over two years barely squeezed through the country's parliament last month, with the prospect of general strikes over wage cuts adding a further element of uncertainty.

Attention has also focused on Portugal, with the deficit cutting measures of the two southern states up for review by EU finance minister on Tuesday. "The bond spreads between Portuguese and German bonds are roughly where Greece was towards the end of last year ... so i think its reasonable to have the mechanism in place," said Mr Pisani-Ferry.

A series of tough Irish budgets have received praise from a number of quarters including Brussels, but analysts have also drawn attention to the dangers posed by the government's bank guarantee scheme, announced in September 2008 when the country's financial system appeared on the brink of collapse.

Economics professor Morgan Kelly at University College Dublin is one of the voices that has raised the alarm. "It is no longer a question of whether Ireland will go bust, but when," he wrote in the Irish Times over the weekend, referring to the huge strain being placed on government coffers by the bank guarantees.

"The Irish economy is like a patient bleeding from two gunshot wounds. The Government has moved competently to stanch the smaller, budgetary hole, while continuing to insist that the litres of blood pouring unchecked from the banking hole are 'manageable'."

The ongoing problems in a number of states mean a call for funds should not be ruled out.

"I wouldn't exclude any one of these states calling on the support mechanism in the coming months," said Daniel Gros, director of the Centre for European Policy Studies think-tank.

Mr Gros has been among those arguing that the €750 billion support mechanism is only a temporary solution and that European politicians must now choose between greater fiscal integration or a system that would allow member states to default on their debt obligations in an orderly manner.

European politicians have so far concentrated on the former, with a taskforce under European Council President Herman Van Rompuy assigned the job of presenting ideas on greater European economic co-ordination so that member states do not repeat the mistakes of Greece.

"Behind the scenes" the second option is also being discussed, said Mr Gros, on the understanding that sovereign member states may continue to flout the block's budgetary rules in the future, even if they are toughened up.

Germany is the only member state that has shown support for the orderly default idea so far, with the country's Chancellor, Angela Merkel, set to discuss economic co-ordination with French President Nicolas Sarkozy later on Monday evening.

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