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European leaders over promise and under deliver again--seem like we've seen this before?
03/26/2012 7:03 pm EST
That certainly gives the impression that Germany has withdrawn its long-time opposition to increasing the size of the EuroZone’s emergency rescue fund so that it might actually be big enough to prevent a problem in, say, Spain, from turning into a EuroZone-wide crisis.
That’s actually not quite true. What we’re seeing in the run up to the March 30 meeting of European finance ministers is yet another example of EuroZone leaders trying to fight a financial fire with firewalls built out of half measures and promises that, upon examination, turn out to deliver way less than is needed.
Here’s the problem. Outside observers such as the United States and the International Monetary Fund say that the EuroZone needs to increase the size of its permanent rescue fund, the European Stability Mechanism that is set to go into operation in July, from its current cap of 500 billion euros to something more like 1 trillion euros. It’s easy to dismiss the U.S. position as self-interested kibitzing, but the IMF “advice” has some real teeth. IMF director Christine Lagarde has said she’s not interested in increasing the support that the IMF could extend to the EuroZone in an emergency until Europe increases the size of its own rescue fund to something near that 1 trillion euro figure.
The deal that Germany seems to have agreed to would be to keep the current temporary rescue fund, the European Financial Stability Facility, in operation in tandem with the permanent rescue fund. That would add the 440 billion euro temporary fund to the 500 billion euro permanent fund and, presto, 1 trillion euros in rescue money.
But the accounting falls apart under even cursory examination.
The temporary European Financial Stability Facility is indeed temporary. It vanishes in 2013. The Germany proposal isn’t even to add the full 440 billion euros in the temporary fund to the permanent fund’s cap but instead just to add the existing programs (total 200 billion euros) for Greece, Ireland and Portugal to the 500 billion cap on the permanent fund. But that takes the total rescue fund to 700 billion and not 940 billion. And even that cap is temporary. When the European Financial Stability Fund goes away in 2013, so too would the 200 billion from the temporary fund. So, in other words, what the Germans have currently proposed is a temporary increase that would last only into 2013.
Even that tricky piece of bookkeeping may actually be beyond Chancellor Angela Merkel’s power to deliver. The temporary expansion of the rescue fund’s cap would, according to calculations by the Financial Times’ Wolfgang Munchau, raise Germany’s contribution to the rescue fund, temporarily, to 280 billion euros from the current 211 billion euros. (A total merger of the entire temporary and permanent rescue funds would take the German total to 400 billion euros.) That’s a problem because the Bundestag voted to approve Germany’s participation in the Greek rescue only after stipulating that Germany’s liability would never exceed 211 billion euros. Merkel got the Greek rescue through the Bundestag only by promising to respect that limit.
It’s not clear to me why the Bundestag would now decide that it is okay to break that promise and raise the limit on German liability. And the German constitutional court has ruled that the Merkel government has to get approval from the Bundestag before it can commit German funds to any new rescue plan.
And let’s not forget the bottom line here: Without a sum much bigger than the 500 billion euro permanent European Stability Mechanism, the European Union doesn’t have enough firepower to backstop Spain.
Looking at slowly rising yields on Spanish debt, it looks like the financial markets understand that.
Looking at Merkel’s domestic political problem, I’d expect more creative promises in the week ahead.
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