The EU's permanent rescue fund, the European Stability Mechanism, is to be beefed up. Now it seems that even the previously reluctant German government has agreed to the measure.
Long-term strategies to lead Europe out of the debt crisis – this is the main issue at the European Union summit in Brussels on Thursday and Friday. One of these strategies is the planned boost to the European Stability Mechanism (ESM). Another is the fiscal union pact, due to be signed at the summit, which will impose stricter budget restrictions on members states, and will – if it comes down to it – have the weight of the European Court of Justice in Luxembourg behind it.
Struggling for long-term stability
Most EU states expect the ESM to provide long-term stability. In July, the fund will replace the temporary European Financial Stability Facility (EFSF), and have the power to distribute 500 million euros ($666 billion) in credit to needy countries.
Unlike the ESM, the EFSF was just a temporary safety net. It had no cash deposits and functioned as a private joint stock company. On the basis of "guarantees," it could hand out up to 440 billion euros to indebted countries – though only to those backed by other EU states.
In contrast, the ESM is to hold cash deposits of 80 billion euros, plus 420 billion euros of capital in guarantees.
On top of this, the suggestion was made in the last few weeks that the surplus EFSF volume – some 250 billion euros – will flow into the ESM. This would give the ESM a maximum capacity of 750 billion euros. Most EU states see this kind of volume as necessary to avoid a domino effect spreading across the bloc.
As former Deutsche Bank chief economist Norbert Walter told Deutsche Welle in a recent interview, the markets are showing that Portugal is already falling into a debt crisis after Greece. If another state like Spain then followed, then the so-called "firewalls" may not be sufficient protection.
That's why Eurogroup boss Jean-Claude Juncker and European Commission President José Manuel Barroso have come out in favor of increasing the ESM's credit volume, and even the International Monetary Fund has also tied its financial support to a stronger ESM.
International pressure on Germany
Only Germany remains skeptical. Berlin announced that it wanted to wait and see what the PSI (Private Sector Involvement) looks like – in other words, how much of Greece's debt cut will be taken on by the private sector. The Greek deal will probably take place in the next ten days.
German Finance Minister Wolfgang Schäuble was noticeably reticent on the issue. Instead of offering a statement, he pointed reporters to the agenda of the meeting of finance ministers that took place shortly before the summit. This would decide whether Greece had fulfilled the conditions necessary for releasing the second rescue package. If these conditions have been met, then a decision could be made in the future over possible restructuring of financial aid.
Presumably that means that if the coming debt cut is successful, Berlin will also consider pumping more money into the ESM. That could then be a subject for the next Brussels summit, which is already being discussed.
Author: Daphne Grathwohl / bk
Editor: Andrea Rönsberg