Economic Performance EMU

A Eurozone Safety Net?

From the FT:

Eurozone authorities would help a member-state in serious economic difficulties before it needed to turn to the International Monetary Fund because of a risk of debt default, a senior EU policymaker said on Tuesday.  “If crisis emerges in one eurozone country, there is a solution before visiting the IMF,” Joaquín Almunia, the EU’s monetary affairs commissioner, said. “It’s not clever to tell you in public the solution. But the solution exists.”


Mr Almunia’s comments made clear not only that EU policymakers would not remain impassive in the face of a crisis in a eurozone country, but would act pre-emptively before a bail-out became necessary. “By definition this kind of thing should not be explained in public. But we are equipped intellectually, politically, economically,” he said.

I’m not sure that it’s really so clever to keep this solution a secret.  As the FT piece notes, there are serious legal restrictions in place that can hinder this kind of thing, such as restrictions on ECB lending to governments (The ECB website states “The Eurosystem is prohibited from granting loans to Community bodies or national public sector entities.”) and the so-called no-bailout clause in the Maastricht Treary prohibiting collective liability for debts (considered “an important pillar on which the European Union was founded” by reliably hard-line ECB Executive Board member Juergen Stark.)

Would it not be better for the Eurozone countries to have an explicit debate about this and, if necessary, outline a strategy and explain why it is legal?  Wouldn’t financial markets be less jittery if they could be genuinely assured that a coherent Eurozone strategy was in place?

6 replies on “A Eurozone Safety Net?”

My guess: there is no secret rescue plan but Almunia (like Merkel before him) is sure one would be knocked together if necessary. I agree with you that this is less than ideal – in fact it seems woefully inadequate. But it’s better than just denying any possibility of a rescue becoming necessary I suppose.

Any comments/intel on the allegation put forward by Jens Nielsen in John Mauldin’s latest investmnet newsletter? Pretty scary if it is true.

“On the 11th February the Daily Telegraph’s Brussels correspondent Bruno Waterfield wrote an article under the header: “European banks may need £16.3 trillion bail out, EC document warns.” In the article, the reporter revealed that he has seen a secret document produced by the EU Commission which briefed the union’s finance ministers on the true extent of the banking crisis. Less than 24 hours later, the article’s header was changed to “European bank bail-out could push EU into crisis” and two paragraphs had mysteriously disappeared. Here they are:
“European Commission officials have estimated that “impaired assets” may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the ‘trading book’ total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets.
In addition, so-called ‘available for sale instruments’ worth £4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion.”
Do yourself a favour – read those two paragraphs again. Newspaper editors do not change content light-heartedly. Did the Telegraph editor receive a call from Downing Street? Or Brussels? Did he have second thoughts about the avalanche that he could possibly instigate? I don’t know and I probably never will. But one thing is certain. If the EU Commission’s estimate of £16.3 trillion of impaired assets is correct, then the crisis is far worse than any of us could ever imagine. Not only would we have to get used to the prospects of a systemic meltdown of our banking system, but entire nations may go down as well.”

The ECB is already funding member states: look at last week’s Irish bond auction, and note the unusually high degree of takeup from domestic banks. These bonds are then repoed to the ECB.

from Eurointelligence a few weeks back

“The Maastricht Treaty’s no bailout rule is a bad rule because most of
the time it is irrelevant, and the minute it become relevant, it is
unenforcable. Luckily this poses no problem from a legal perspective,
which is another reason why the no bailout rule is a bad rule: The
minute the bailout rule becomes relevant, another rule takes
precedence. It is contained in Article 100 (section 2) of the Consolidated Treaty.
We call it the Bailout rule.

Where a Member State is in difficulties or is seriously threatened
with severe difficulties caused by natural disasters or exceptional
occurrences beyond its control, the Council, acting by a qualified
majority on a proposal from the Commission, may grant, under certain
conditions, Community financial assistance to the Member State
concerned. The President of the Council shall inform the European
Parliament of the decision taken.

There you have it, Article 100, section 2 is the Bailout Clause.
Nobody needs to circumvent any laws. If, or rather when, Ireland
evokes exceptional circumstances beyond its control, there will be a
meeting of finance ministers, which by a qualified majority will
decide on a bail out Ireland – in the form of a loan, perhaps together
with the International Monetary Fund. Of course, such a bailout is
voluntary from the perspective of the donors. If country X does not
want to bail out, and gets outvoted on QMV, it cannot be forced to put
up any money. We do not see a situation arising in case of Ireland, as
even the German finance minister Peer Steinbruck now sees the need for
such action. Our interpretation of this departure from Germany’s
official “Everybody is doing their own shit” policy (according to
Sarkozy) is quite simple: Steinbruck probably expects a default to
happen, and is afraid that it might spread fast and get really
expensive. So he wants nib in the bud. Another misjudgement probably,
but then who is surprised?

In any case, you can safely forget the No Bailout clause. It is a
total irrelevance from a political, economic and also from a legal

“Would it not be better for the Eurozone countries to have an explicit debate about this and, if necessary, outline a strategy and explain why it is legal? Wouldn’t financial markets be less jittery if they could be genuinely assured that a coherent Eurozone strategy was in place?”

Yes they would, which is why the criticisms of member states who decided to make a plan, even a bad plan, and go with it rather than wait for the Eurocracy to figure one out are and were misplaced. The fact that we are now way past the bank guarantee phase with no plan in sight vindicates those countries who essentially voted no confidence in the likelihood of one coming in time.

That’s not to say the plans that were gone with shouldn’t be revised in the light of the passing of the crisis from the acute phase to the chronic.

I would take Almunia’s comments seriously, but such considerations take us quite a way from economic policy making.
Would it not be better for the Eurozone countries to have an explicit debate … about economic policy, ok. Interventions however are more effective when there is an element of surprise.

Explain why it is legal? No problem, as per above

Wouldn’t financial markets be less jittery? No. Interventions and solutions are not necessarily synonyms, especially if it is just a question of speculation as to which measures might be taken. Best for all here to keep the debate at the level of broad economic policy.

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