Tag Archives: European Financial Stability Facility

What’s Behind the New Eurozone Fiscal Stability Union?

This European Council meeting was quite tumultuous, it appears. But we do have an outcome – a “fiscal stability union”. Below I present a preliminary critical assessment of the proposal, as well as a comment on the toxic role of the United Kingdom in the negotiations.

The “Fiscal Stability Union” in a Nutshell

The statement of eurozone leaders is scant on details. However, what we know is that:

  • The golden fiscal stability rule that annual structural deficit should not exceed 0.5% of nominal GDP will be enshrined in eurozone Member States constitutions or equivalent acts;
  • There will be an automatic correction mechanism in national legislation that shall be triggered in the event of deviation;
  • There will be common standards for the automatic correction mechanism and compliance with those standards will be monitored by the European Commission; the transposition of those standards will be subjected to the jurisdiction of the European Court of Justice;
  • Eurozone Member states will have to report their national debt issuance plans;
  • When a Member State breaches the 3% budget deficit ceiling there will be automatic consequences unless a qualified majority of Member States decides otherwise;
  • Some of those measures will be pursued by more active use of enhanced cooperation.

Urgent Measures

The eurozone leaders have also agreed on a couple of urgent measures:

  • The European Stability Mechanism (ESM) treaty will enter into force as soon as Member States representing 90 % of the capital commitments have ratified it, preferably by July 2012;
  • Ensuring a combined effective lending capacity of EUR 500 billion by the European Financial Stability Facility (EFSF) and ESM;
  • Provision of additional resources for the IMF of up to EUR 200 billion (USD 270 billion), in the form of bilateral loans;
  • Unanimity for the ESM will be replaced by a qualified majority of 85 % in case the Commission and the ECB conclude that an urgent decision related to financial assistance is needed.

Legal Analysis of Proposals

Given the objection of the United Kingdom, and possibly Hungary, the revision of EU Treaties seems impossible at the moment. That is why the eurozone leaders speak about an “international agreement” that should be signed by March 2012. This agreement will not be part of EU law (at least initially). I fail to see, though, how can the European Commission participate in the monitoring of fiscal stability in this case. Enhanced cooperation (Art. 20 TEU and art. 329 TFEU) seems more appropriate. The problem there is that only the European Commission can propose an enhanced cooperation to the Council, and the European Parliament must also approve it. This can lead to substantial delays of the procedure. That is why a two-track strategy appears more appropriate. Common standards for fiscal stability should be specified in the “international” agreement. Together with it the eurozone member States should initiate an enhanced cooperation authorization procedure. That is important, because any credible fiscal stability regime will need to transfer monitoring powers to the European Commission. This means that the drafting of rules must start now, in close cooperation with the European Commission and the European Parliament.

The Toxic Role of the United Kingdom

For some time I have been quite skeptical of UK’s role in the European integration process. There are deep divisions within the British political establishment on UK’s place in the EU. However, those internal divisions are spilling over to the EU and creating instability. The truth is that there are too many UK politicians that want the UK out of the EU, and in the European Economic Area.

I fully support the right of UK to define its own place in the integration process. With its decision to object to the new eurozone governance rules, the UK is basically signaling its determination to distance itself further from core EU countries. However, I think that the UK must not be allowed to unilaterally obstruct the further building of the European project. That is why a new political dialogue must be started among EU Member States about the possible modifications of UK’s scope of membership and responsibilities in the EU. This process must reflect the UK’s concerns, as well as the strategic objectives of the Union. What is clear is that we cannot continue to pretend that the UK is on board in support of the integration process.

The Second Greek Bailout: the Details

The leaders of the eurozone have approved the second bailout of Greece that is supposed to finally overcome the debt crisis in this country. The total official financing will amount to an estimated 109 billion euro. The European Financial Stability Facility (EFSF) will be used, but the maturity of the loans will be extended from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years. Lending rates will be around 3,5%, close to the costs of borrowing for the EFSF. The maturities of existing loans from the first Greek bailout will be extended. The private sector will contribute with up to 37 billion euro. Financial institutions will be offered a set of optional forms of contribution, including the buy-back of Greek debt, the extension of bond maturities and the rollover of existing debts. Greek banks will be recapitalized “if needed”.

The EFSF and the European Stability Mechanism (ESM) will be allowed to:

  • act on the basis of a precautionary programme;
  • finance recapitalisation of financial institutions through loans to governments including in non programme countries ;
  • intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability.

The EFSF lending rates and maturities for Greece will also be applied for Portugal and Ireland.

So will the new bailout be effective? It’s hard to say. The economic commentators are somewhat sceptical. Felix Salmon notes that this deal is not enough on its own to bring Greece into solvency. He believes that this is not a one-off event and that the same instruments will have to be used for Portugal and/or Ireland.

It’s clear that the deal will alleviate fears for a financial meltdown in the eurozone. However, the deal does not efficiently address the growth problem for Greece (and by extension for Portugal, Ireland, Spain, etc.). The fundamental problem of the eurozone persists. Until we manage macroeconomic imbalances and structural impediments to growth, we will not be able to overcome the reasons for the current debt crisis.

 

 

The Legal Framework of the European Financial Stability Facility

We now have the initial legal framework of the European Financial Stability Facility. It will be registered as a limited liability company under Luxembourg law (Société Anonyme). The EFSF has been incorporated with Luxembourg as its sole shareholder to expedite its creation, but after the completion of the national approval procedures the shareholding of each Member State in the EFSF will correspond to its respective share in the paid-up capital of the ECB. The obligation of euro-area Member States to issue guarantees for the EFSF debt instruments will enter into force as soon as a critical mass of Member States, representing 90% of shareholding, has completed the relevant national parliamentary procedures.

At the same time EU governments agreed to provide their national budget drafts to each other and to the European Commission before seeking national parliamentary approval. The idea is for each government to present its broad estimates for growth, inflation, revenue and expenditure levels in the spring, roughly six months before national budgets go through parliaments.

Eurointelligence once again underscores the importance of a more comprehensive policy response, citing the Concluding Statement of the IMF Mission on Euro-Area Policies. The main difference is in thoroughly addressing the macroeconomic imbalances, including in the German tax and regulatory systems which have built-in incentives for manufacturing investments, and disincentives for consumption.