The communiqué by which ECOFIN announced - quasi triumphantly - an agreement on the “amount” of the future “European Permanent Stabilisation Mechanism”, is bound to disappoint the markets and increase instability.
Indeed, the only “new” element is to confirm that there will be no increase in the combined size of the existing temporary € 440 billion EFSF and €60 billion EU budget Facility but, that from 2013 onwards, it will be the full rather than only a fraction of that amount that will be made available.
One should recall that last autumn, once it became clear that the EFSF would be activated for the Irish rescue, the conclusion was rapidly reached that the size of the Fund was inadequate to deal with more than one additional intervention (Portugal) which is the reason that prompted the European Council to mandate its President to devise a “Permanent” solution. It is only a couple of months later, at the time that the EFSF was in the final preparations of its very successful market debut, that it became known that its true borrowing capacity was constrained to some €250 billion (amount attributable to the AAA rated members of the EMU guarantee consortium).
Under such conditions, it is hard to see how the ECOFIN announcement adequately responds to the European Council November mandate and that, as commented by some Ministers, this amount is suddenly deemed to be adequate.
If, indeed, the question of the “amount” is now considered definitively resolved, the additional modalities by which the full amount will be made available, to be agreed upon end of March, will hardly matter as the new Mechanism will be woefully undercapitalised, in particular if it is called upon to substitute for the ECB in stabilising secondary sovereign debt markets.
One should therefore not be surprised if markets react negatively. The consequence will be that when – at last – the appropriate measures will be forced upon the Authorities (both President Sarkosy and Chancellor Merkel are committed to do “all what it takes to save the Euro”), it will cost far more than if the appropriate decisions had been contemplated from the outset. When it comes to agreeing on such complex and emotional matters, a far more thorough preparation is needed, shielded from unnecessary political posturing.
Brussels, 15th February 2011
Paul N. Goldschmidt
Director, European Commission (ret); Member of the Thomas More Institute.
Tel: +32 (02) 6475310 +33 (04) 94732015 Mob: +32 (0497) 549259