ANALYSIS:The 16 euro zone countries will get drawn ever deeper into each other's fiscal affairs
AFTER MONTHS of indecision, moves to set up a rescue mechanism for all euro countries are a huge leap into the dark for the European authorities. The development, which marks a capitulation to market forces, suggests EU leaders perceive a serious threat to the single currency in the turmoil unleashed by Greece’s financial crisis.
As a fully-fledged sovereign debt crisis in the euro zone draws closer, this is Europe’s “big bang” response. The rescue mechanism as framed would essentially enable distressed euro countries to draw special loans from the European Commission. In a separate but related development, the purchase of government debt by the European Central Bank (ECB) is also in prospect.
While numerous technical and legal questions remain to be answered, it is clear that hundreds of billions of euro would be involved if either plan was deployed. Each is emblematic of a massive expansion in the EU’s economic remit and each takes the 16 countries that use the euro deeper and deeper into each other’s fiscal affairs. For Minister for Finance Brian Lenihan, this will mean yet more pressure to balance the public finances from Brussels and the markets.
If the euro is the single biggest example of European integration, more integration could yet flow from this affair. Already on the table, for example, are plans that would oblige governments to submit their budget plans for prior approval to other capitals. Whatever the outcome of the talks, budgetary surveillance will intensify in the future and economic targets will be tougher.
Thus the plans are fraught with tension, weighed down by huge financial risk and riddled with potential for conflict.
As the 27 EU finance ministers gathered in Brussels yesterday, the atmosphere was described as “tense”. It was the same on Friday night when the leaders of the 16 euro countries decided to rush out a drastic plan to shore up the euro before markets reopen this morning after the weekend break.
This raises serious questions about the merits of creating the expectation of a silver bullet to diminish a crisis whose ultimate solution lies in a years-long effort to bring wayward public finances to heel throughout the euro zone. That said, the move reflects the sense of alarm that has taken hold in capital cities throughout Europe.
While the relentless politicking that delayed the Greek rescue exposed seismic schisms between Berlin, Paris and Brussels, the present debate is no less barbed. In many ways, however, this is but the logical outcome of the Greek rescue. After all, the €110 billion bailout for Athens set a precedent for euro countries assuming the financial burden of a partner in distress.
Once they went down that road – and not a single cent has yet been handed over to Athens – every country was essentially on the hook for every other country. EU leaders certainly didn’t want to go any further than their ad hoc intervention in Greece, but the force of the contagion that took hold as Spain and Portugal came under pressure last week was such that further action was inevitable.
There would be two separate strands to the loan mechanism. First, an existing EU scheme which enables non-euro members to draw down loans from the European Commission to help balance their books will be extended to empower the commission to lend to members of the single currency.
In the past, Hungary, Romania and Latvia were beneficiaries of such funding. The commission sources money for this scheme – known as the “Balance of Payments Facility” – on international markets using its own budget as collateral. Under discussion yesterday was a proposal to increase the money available from the facility by some €60 billion to about €110 billion. Comparatively, however, this is small money.
Hence a separate manoeuvre massively to increase the commission’s borrowing power by having member states guarantee the money it sourced on the markets to be lent to distressed euro countries. In its conception, this is a simple idea. In practice, the notion spawns a litter of dilemmas. Prime among the unanswered questions yesterday was whether the loan guarantees should come exclusively from the euro zone countries or from all 27 member states.
In favour of a 27-country guarantee is the argument that the “community instrument” such as the mooted stabilisation fund – whose activation would bring a huge financial weight on the commission – should be supported by all member states. As the talks began, however, British chancellor Alistair Darling argued that only the euro 16 should be guarantors.
While numerous other questions arise, the legal significance of the initiative’s structure is that it would not violate the no-bailout clause in the EU treaties. The bailout ban prohibits special ECB overdraft facilities for euro countries. The commission would lean on a separate legal provision that allows the granting of EU “financial assistance” where a member state is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control.
Still, the ECB was widely expected last night to make a significant intervention in its own right by promising to buy up government bonds from euro countries. This lies within the bank’s powers, but is itself highly risky as it essentially involves releasing hundreds of billions of euro into the European economy.
With that comes the threat of rising inflation and the prospect of higher interest rates, something that carries its own risks in a volatile economic scenario.
Still, the clear sense in Brussels is that the time for decisive action to save the euro is nigh. It was not without irony that the talks yesterday took place on Europe Day, when the EU marks the anniversary of the 1950 call by French foreign minister Robert Schuman for Franco-German coal and steel production to be placed under a common high authority. While the EU traces its roots to that clarion call, its unity and sense of mission are being tested now as never before.