The European Union’s finance ministers were on Sunday night struggling to put together a package of crisis financing ahead of Monday’s re-opening of the markets.
Late on Sunday evening, the ministers were considering a proposal from Spain, which holds the presidency of the Council of Ministers, for creating a fund of €440bn. This, together with other measures, would take the total amount in potential support to more than €550bn.
There are two elements of possible aid that are being made available.
1- A deal has been done to create a rapid reaction financial stabilisation mechanism, run by the European Commission, which would send liquidity to countries in a financing crunch. The model is the balance of payments facility that already exists for countries outside the eurozone – it has already been made available to Romania, Latvia and Hungary –, which allows the commission to borrow up to €50 billion a year on international markets, using the credit of the EU budget. This mechanism is to grow by €60 billion (reaching €110bn), and will be allowed to offer support to countries inside the eurozone. The legal basis for this mechanism will be a bit of the Lisbon Treaty that allows money to be sent to countries within 48 hours in the event of a natural disaster or other exceptional event beyond its control, known as Article 122. Effectively the Commission would borrow money, using the EU’s annual budget (in the region of €140bn as collateral), to make available to the state in need. The loan is underwritten by the member states’ contributions to the EU budget. The British government has signalled it will support this mechanism, even though this could involve Britain being on the hook for its share of the losses in the event that a country bailed out could not repay the money. The EU budget is not allowed by law to go into debt, so if a country were helped out by the stabilisation fund and then failed to repay the assistance, the 27 member countries of the EU would have to top the EU budget back up. Britain’s share would be about 12% of any losses, and this may or may not become a political issue in Britain (though they are a little busy in Britain right now).
However, such a fund is not large enough to contain further eurozone “contagion”.
2- The second element is the creation of a fund – reportedly as large as €440bn – using guarantees from eurozone member states. This is more problematic. One element of controversy is the role of the European Central Bank (ECB). Sweden and the UK, which are not part of the eurozone, are members of the European Central Bank system, but do not want the ECB involved in such a fund. This would involve member countries of the club offering national guarantees for loans to countries in trouble. There is a European Commission proposal on the table that describes one way of doing this, that would give the commission the power to borrow on the markets over and above its €60 billion warchest, using joint guarantees from eurozone countries, in proportion to their share of the paid-up capital of the ECB. More recently, a Franco-German proposal has emerged that cuts the commission out of the picture, and keeps the whole thing on a firmly intergovernmental basis. This proposal would be a standing system of bilateral guarantees for eurozone countries in need. Membership of this network would not be compulsory: the big idea is for the biggest and strongest economies of the eurozone to stand together and warn markets that they will extend unlimited loan guarantees to fellow users of the single currency, to beat off any market attacks. The conditions would be based very much on the model that emerged for the Greek rescue package. A country in need would have to go to the ECB and the commission to make a case that it needed help. As in the Greek case, the Germans are insistent that the International Monetary Fund must also be involved in imposing conditions on a country being bailed out.
If something like this is agreed, Germany has moved a very long way since its insistence, a few months ago, that a country in trouble for breaking the strict budget discipline of the euro, such as Greece, should save itself through austerity alone. The political reality is that the euro is in real danger, and Germany is acting to save the euro.
One thing is clear. The eurozone has finally realised that it has all but lost the confidence of the markets by making bold announcements backed either by no money or too little money. José Manuel Barroso, the European Commission president, was a leading voice last week in urging EU leaders to put something very large on the table, or risk an appalling reaction when markets opened on Monday morning.
A final thought. Is this the start of a fiscal union or political union, a great leap forwards in EU integration? I have been saying for ages that I did not sense such a leap in integration, and I stick to that. I think political will is increasing, but it is in the direction of intergovernmentalism, not federalism. In fact, as a wise colleague pointed out to me just now, this crisis has actually shattered the idea that the eurozone as a whole is a single unit. It is, in his words, the return of country risk, as markets test and probe the credit-worthiness of each member.
The coming week would and will be exceptionally perilous for the euro if markets suspect for an instant that bold declarations about solidarity in the EU are not matched by very large sums of real money, available rapidly.
UPDATE at 23.00pm local time. A colleague from the Guardian has seen the paper being discussed by the ministers upstairs. This talks of €440 billion from eurozone members, plus the €60 billion that the commission can raise from the EU budget. A further sum, unspecified, would come from the IMF. The draft paper also specifically demands additional budget consolidation efforts from Spain and Portugal, amounting to 1.5% of national income this year and 2% next year.