Europe needs a strong financial firewall to withstand the current and any future debt crisis – this much European leaders agreed on when they decided to launch the permanent rescue fund, the European Stability Mechanism (ESM), this summer, a year earlier than planned.
What they disagreed on was how high these walls should be. A meeting of EU finance ministers and central bankers this Friday in Copenhagen is supposed to find consensus, but the language used in the run-up suggests the parties' positions are far apart.
"The mother of all firewalls should be in place, strong enough, broad enough, deep enough, tall enough, just big,” Angel Gurria, Secretary General of the Organisation for Economic Cooperation and Development (OECD), told reporters earlier this week in Brussels.
He called for a European bailout fund of €1 trillion ($1.3 trillion), arguing that “when dealing with markets, you must overshoot expectations.”
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The permanent bailout fund is meant to replace the European Financial Stability Fund (EFSF), formed as a temporary solution to the eurozone's sovereign debt crisis. The EFSF has so far provided financial aid to Portugal and Ireland after those two countries were downgraded by rating agencies and found themselves unable to raise money at the financial markets.
But the goal of the ESM is to signal to investors that eurozone economies are a safe bet.
“It’s a bit like a nuclear weapon,” said French Finance Minister Francois Baroin in a televised interview today. “It is meant to be a deterrent rather than to be used.” France too would like the firewall to be as high as possible, the minister said.
Germany, Europe’s biggest economy, will have to shoulder the largest part of the ESM. Right now the plan is to provide the fund with €500 billion ($664 billion) in funding, €210 billion ($279 billion) of which Germany would contribute in cash and guarantees.
Naturally, resistance against a larger fund comes mainly from Berlin, and so far Chancellor Angela Merkel has officially rejected any calls for an increase.
Jens Weidmann, president of the Bundesbank, Germany’s central bank, and formerly economic adviser to Mrs. Merkel, was uncharacteristically frank when reacting to the OECD’s proposal. “Ring-fencing is certainly a sensible approach, but just like the Tower of Babel, the Wall of Money will never reach heaven,” he said in a speech at the London think tank Chatham House yesterday. “If we continue to make it higher and higher, we will, in fact, run into more worldly constraints, creating new financial and political problems.”
The danger is, according to Mr. Weidmann and other critics, that eurozone countries do not put enough emphasis on balancing their budgets and on implementing structural reforms, which make their economies more competitive. “The whole idea of rescue funds made sense when the debt crisis affected the periphery of the eurozone only,” says Christian Dreger of the German Institute for Economic Research in Berlin. “You can bail out Greece or Portugal. You can’t bail out Italy, no rescue fund is big enough.”
The most likely outcome of the finance ministers’ meeting, according to a draft resolution, will be a decision to run the temporary and the permanent bailout funds parallel for a certain time, thus creating a combined volume of €700 billion ($930 billion). It is a compromise the Germans could live with, Chancellor Merkel has indicated.