THE EFSF is dead. Long live the ESM. Well, sort of. The euro zone’s temporary rescue fund, the European Financial Stability Facility, is not quite dead. And the European Stability Mechanism, which formally superseded it today, has not fully come into life.
Just a few weeks ago the euro zone was hugely relieved when the German constitutional court turned down pleas to block the ESM. Yet there was little fanfare about today’s launch of the ESM. Some of the finance ministers gathered in Luxembourg today spoke of historic milestones. But as he arrived, Olli Rehn, the European Commissioner in charge of the euro, could summon no more enthusiasm than to say: “I am less pessimistic for the moment for the euro zone than in the spring.” And far from rejoicing, European markets fell because of fears about weak growth in Asia.
As so often in the course of the euro’s crisis, removing one obstacle only reveals the other blockages that lie beyond. Yet nobody is quite sure of the real power of the ESM, or of how and when it will be called into action.
Klaus Regling, the old-new head of the ESM (who still runs the EFSF), said a final decision had yet been taken on whether the ESM could, like the older EFSF, leverage its lending capacity by means such as providing partial insurance against losses for those buying the bonds of vulnerable countries (one option being examined to help Spain while preserving funds for other uses).
More seriously, Germany, Finland and the Netherlands are resisting the idea that the ESM could be used directly to recapitalise troubled banks in Spain and Ireland, thereby lifting the debt burden on their governments. For now, the ESM will probably start lending money to the Spanish government in November so that it can recapitalise banks on its own tab. The euro zone has already agreed to lend Spain up to €100 billion, but Spain now reckons it will need only about €40 billion of public money to fix its banking sector, or about 4% of Spanish GDP.
With Greece’s second bailout programme now off track, the country will need a third rescue – or at least a heavily revised second package – that may require yet more money, and possibly debt forgiveness from the euro zone. Despite optimistic talktonight about Greece’s “impressive” progress under its newish prime minister, Antonis Samaras, no decision will be taken on Greece until the troika (the European Commission, the ECB and the IMF) draws up a formal report in the coming weeks. Moreover, before the next summit on October 17th-18th Greece will have to implement what remains of 89 prior actions agreed in March.
Funded by paid-in capital rather than sovereign guarantees from states with a mixture of credit ratings, the ESM is supposed to provide a more powerful tool than the EFSF. Its decision-making system is also meant to be more flexible, permitting action to be taken in an emergency with 85% of votes cast (ie, only Germany, France and Italy could block a decision). The EFSF will continue lending to existing programme countries – Greece, Ireland and Portugal – and will run alongside the ESM while the new fund’s capital is built up to its full lending capacity of €500 billion in 2014 (FAQ sheet on the new ESM is here)
The ESM is at the heart of two planned mechanisms to tame the crisis. The first is its use as a part of an enhanced firewall. Questions about whether it was large enough credibly to protect Spain and Italy have been allayed since the European Central Bank (ECB) declared it was ready to intervene to buy the bonds (in unlimited quantities) of countries that seek help from the ESM and submit to euro-zone strictures for budgetary and economic reform. But for now, at least, Germany is telling Spain not to seek a fuller bailout.
The second use of the ESM is as part of the so-called banking union to stabilise the euro zone’s banking sector. European leaders in June resolved to create a single euro-zone banking supervisor. Once this is established, the leaders said, the ESM could be allowed directly to recapitalise troubled euro-zone banks. This was at the heart of the summit’s call to break “the vicious circle between banks and sovereigns”.
To make sense, a banking union would also require a euro-zone resolution system to restructure or wind up failed banks, and a euro-zone deposit guarantee scheme (in turn supported by a common fiscal backstop, such as the ESM). The European Commission would like to present proposals on these steps next year.
But banking union faces multiple obstacles. One is German objections to plans to have the ECB supervise all banks, including the myriad small German lenders. A second is its insistence that the ECB should take its time to prove it is an effective supervisor. A third hurdle is German resistance to a single resolution fund, let alone a single deposit-guarantee system. A fourth is the surprising letter declaration by Germany and two other hawkish creditor states, Finland and the Netherlands, that any direct bank recapitalisation should exclude “legacy assets”.
Quite what this means is still unclear, though there is ill-disguised fury in France and peripheral countries about Germany appearing to renege on a central deal. Pierre Moscovici, the French finance minister, said: “I participated in a number of decisions that were without ambiguity. Change (by Germany) is possible. But not a misunderstanding.”
Earlier Wolfgang Schäuble, his German counterpart, seemed a bit less abrasive, but was giving nothing away. Of course agreements would be kept, he said. “We will talk about implementing a European banking supervision tomorrow. That's easier said than done.”
Between now and the next European summit, the effort of several euro-zone states will be to push Germany back to the starting position of the June summit. One euro-zone diplomat said: “The Germans are re-reading their declaration.” Will they succeed? Perhaps only if markets take a turn for the worse. For as long as markets remain nervous but not panicky, progress towards banking union is likely to be painstaking. And despite entreaties from many that Spain should take the money to activate the ECB, Madrid is likely to hold off asking for the fuller bailout, fearing a German rejection.
One reason to wait is to wrap the Spanish rescue with the decision on Greece, and the looming bailouts for Cyprus and perhaps Slovenia, into a single package; this would ensure that the increasingly restive Bundestag is called to vote only once, than four times.
Another reason for delay may be the hope that the most difficult parts of the banking union can be postponed until after next year’s German general election. If so, the euro zone will limp on rather like the EFSF and ESM rescue funds – neither alive nor dead. (Molly)
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