Published in Finnish daily Taloussanomat:
http://www.taloussanomat.fi/kansantalous/2012/06/20/britit-kertovat-suomelle-10-syyta-hylata-evm/201231947/12
On Thursday, the Eduskunta will vote whether to approve the Treaty establishing the European Stability Mechanism (ESM), the permanent eurozone bailout fund, which is due to provide loans to eurozone countries and (indirectly) also banks that are in trouble. The aim is to get this fund up and running from July 2012 on, which will necessitate a strong sprint to the end, as it just emerged that the Italian Parliament might not succeed in this, and might therefore endanger the bailout for Spanish banks which European governments prefer to finance through the ESM.
On Thursday, the Eduskunta will vote whether to approve the Treaty establishing the European Stability Mechanism (ESM), the permanent eurozone bailout fund, which is due to provide loans to eurozone countries and (indirectly) also banks that are in trouble. The aim is to get this fund up and running from July 2012 on, which will necessitate a strong sprint to the end, as it just emerged that the Italian Parliament might not succeed in this, and might therefore endanger the bailout for Spanish banks which European governments prefer to finance through the ESM.
Here are 10 things one should know about the ESM:
1. On (or over?) the
border of legality
It has always been very doubtful whether the rule in the EU Treaty,
which makes each country responsible for its own debts (article 125), even covers
all the bailout loans. Currently, these loans were being issued by a temporary
emergency bailout fund, the “EFSF”. Through a modification[1]
of article 136 TFEU, European governments want to achieve a legal basis for the
17 eurozone countries to set up a permanent transfer mechanism. The problem is
that not all 27 EU member states will have approved this modification by 1 July
(at least the UK
won’t), so the ESM will be operating without legal basis from the beginning.
2.
This time, it’s about real money
Just like the EFSF, the ESM will also
be largely financed through borrowing (for 620 billion euro, of which Finland
guarantees 11,14 billion euro), whereby member states only provide (risky)
guarantees (which for the EFSF is happening on more and more expensive terms,
by the way). Unique however, is that the ESM will also be given 80 billion euro
of real capital, directly provided by member states, of which, most will need
to borrow yet again more money to obtain this capital. Finland will need to pay 1,44 billion euro in full
this year: a commitment apparently made in return for a special arrangement
whereby Finland received collateral
in return for aid to Greece,
a doubtful situation. In financial terms, providing capital is similar to
providing all kinds of risky guarantees (to which politicians have used since
the banking crisis erupted). Politically speaking however, there is a big difference, given the fact it isn’t
possible to just shift risks into the
future.
3.
This doesn’t solve the eurocrisis
Money won’t solve the eurocrisis, as can be witnessed in the case of
Spain.After Spain had been promised 100
billion euro for its banks, Spain’s 10 year borrowing costs went on to drop for
only a few hours then reach more than
7,2 percent one week later. The eurozone’s periphery is stuck with an
overvalued exchange rate, complicating growth. Until that issue is tackled, a
hard task without fundamentally rethinking which countries can share a
currency, all efforts to restore growth to the eurozone’s periphery will be
fruitless. Until then, fiscal transfers will merely serve to pay unemployment
benefits, not to create jobs for people in the periphery, where unemployment
has now reached toxic levels.
As gigantic as the emergency fund of 700 billion euro may seem, in
practice, the combined firepower of the ESM and the EFSF, which still has 200
billion euro at its disposal, won’t be more[2]
than 500 billion euro. At least that is under the assumption that capital
payments won’t be speeded up, as article 41.2 of the ESM Treaty requires that
there should always be a minimum of 15 percent in capital from member states
within the ESM’s coffers. Five hundred billion euro is widely considered to be
insufficient to deal with great shocks. Instead, something like 2000 billion
euro or maybe even more[3]
is needed to calm down the situation until the end of 2014,considering the
refinancing needs of major periphery countries like Spain
and Italy.
So far, the ECB has fulfilled the role of the euro’s saviour, and most
likely the ECB will be asked again to come up with yet another way to support
struggling member states through all kinds of acronym – designated - vehicles, named
LTRO[4],
ELA[5],
Target2, or SMP[6]. In any case, few doubts remain on who will
finally pay the bill: taxpayers.
4.
It can easily become more expensive
Continuously, proposals are being put forward to
enlarge the firepower of the emergency fund or to allow it to send money to
banks directly and not through member states.[7]
Increasing the 700 billion euro capital stock or the
total lending capacity (which is limited to 500 bilion euro), is allowed in the
ESM-Treaty by unanimous vote of the Board of Governors (the body within the ESM
composed of the eurozone’s Finance Ministers). No Treaty change is needed.[8]
Article 10 of the Treaty describes how the authorised
capital stock can be increased, stating that “such decision shall enter into
force after the ESM Members have notified the Depositary of the completion of
their applicable national procedures.” This doesn’t however mean that countries
can let such a decision depend on the approval of national parliaments. Once
the Finance Minister has given such “notice”, the decision can’t be reversed any
more, whatever national parliaments or courts
decide.[9][10]
5.
Taxpayers, not banks, will pick up the bill
Ideas to let investors share the burden of the pain –after many among
them have been enjoying the gain —have been abandoned. There will be no forced
private sector involvement (PSI) in cases in which a country is deemed
insolvent.[11] That’s unfair, and
provides the wrong incentives if one wants to avoid a new debt crisis.
6.
Finland won’t be able to veto emergency ESM spending, unlike Germany,
France and Italy
In emergency cases, only 3 countries hold a veto against ESM loans to member
states. This because article 4.4 of the ESM-Treaty, which allows in such cases to
take a decision on granting a bailout with a qualified majority of 85 percent
of the votes. Although there is still a requirement for the European Commission
and the ECB to say that a failure to act “would
threaten the economic and financial sustainability of the euro area”, this is
something that can be applied to virtually every eurozone crisis event. Only Germany, France
and Italy
will dispose of minimal 15 percent of the ESM’s capital (and accordingly also
of the votes within the ESM), and therefore only they will enjoy a veto.
Constitutional concerns raised in Finland were quickly
rebutted by a promise[12]
that the emergency procedure would only be used in “very exceptional
circumstances” and that in case of bailout loans, a small amount of money will
be set aside as an “emergency reserve fund” to be used by all ESM member states
(not just Finland) “in order to prevent possible setbacks related to the loan,”
the Dutch Finance Minister has declared. He specified that for a loan of 5
billion euro, this would involve no more than 0,3 billion euro, which makes clear
it would cover only a tiny part of losses in case of hard sovereign defaults.[13]
7.
Also countries in trouble will need to contribute to the ESM’s
capital
As bizarre as it may sound: Greece, Ireland, and
Portugal, which all are being bailed out already, are also obliged to put up
capital, which their national budgets have taken into account already, although
this sounds suspicious in the case of Greece.[14].[15]
When a country doesn’t pay, the amounts which the others need to pay don’t
change, because it is written into the ESMTreaty.[16]
Countries that haven’t paid lose, however, their voting rights.[17]
An estimate reveals that if Greece,
Ireland, Portugal, Spain,
and Italy would end up in
this situation, Germany and France
would together control more than two thirds of the voting power. Maybe that’s
political fiction, but it illustrates how surreal everything is becoming. In Berlin, ESM critics can be heard mocking the rule as its only purpose is that ultimately Germany (or Finland for that matter) will pay
up so it doesn’t lose its voting power.
8.
Germany and France
could use the ESM as leverage to influence EU policy
The ESM isn’t just another EU prestige project, but rather an instrument
to indirectly provide the European level with influence on what was, until
recently, the untouchable heart of national sovereignty: the national budget.
About two thirds[18] of EU regulations for 500
million Europeans emerges at the EU level, but the EU budget only accounts for
about 1 percent of GDP.
As a consequence of the Lisbon Treaty, from 2014 on, it will become
possible[19] for the eurozone member
states to outvote the non-eurozone members in cases where EU rules are being
decided by qualified majority voting because the eurozone will then account for
more than 65 percent of the EU’s population
It’s not a stretch to say that considering the importance of the ESM for
the financial situation of member states, it will be hard for Germany and
France to resist using this as a hedge to reach consensus at the eurozone level
on issues which are being lumped together in the usual EU horse trading. The
eurozone deal can then being imposed on the rest of the EU. Surely decision
making at the EU level is often being decided in consensus, but always with
voting power in the back of everyone’s mind. The loss of the Finland’s veto can therefore have
far reaching consequences.
9.
Who are the eurozone’s future creditors?
It’s interesting to look at who will actually lend money to that future eurozone
bailout fund. If we assume that the situation won’t be much different than for
the EFSF, Asia will become a fairly important player in financing European
governments, given that it accounts for about 40 percent of borrowing to the
EFSF, of which Japan
accounts for about 20 percent.[20]
China
has also manifested itself, and immediately
set conditions for buying eurozone bailout bonds.[21]
Considering the questionable democratic nature of many Asian countries, we
should ask whether this is a positive evolution. As opposed to the United States,
which also borrows much from China, European countries do not dispose of the
“exorbitant privilege” of having the world’s reserve currency, so they are a
lot more vulnerable when it comes to that.[22]
Of course it’s possible that China,
or any new powers at the world stage, don’t have any appetite in the first
place to help Europe.[23]
Then letting the ECB go all out will of course become the obvious way out for
many politicians. François Hollande, the new French President, has already
openly called for the ECB to directly finance the ESM.[24]
The European Commission also supports this position and is now trying to push Germany
to agree with this.[25]
10.
Control on ESM spending is already being considered insufficient by
national Courts of Auditors
A number of national Court of Auditors have complained
about the way in which many billions of euros of taxpayers money will be spent.
[26]
Unfortunately this is not a unique situation at the EU level: for years now,
the Court of Auditors continues to refuse to give the EU budget a clean bill of
health because spending suffers from too many errors. Since the criticism was
issued, the ESM Treaty hasn’t been adapted in a sufficient way. In April, the
Dutch Court of Auditors repeated its concerns in a hearing at the European
Parliament, lamenting that “the arrangements formulated in the ESM Treaty for
transparency and accountability are weak and as far as we know nothing concrete
– aside from the hearing being held today – is being done to alter this”. It’s
telling that before its start, heavy doubts have arisen on the reliability of
the ESM.
[1] European
Council Decision of 25 March 2011 amending Article 136 of the Treaty on the
Functioning of the European Union with regard to a stability mechanism for
Member States whose currency is the euro: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:091:0001:01:EN:HTML
[2] See Open Europe Blog,’ who’s afraid of a big
bad bailout fund?’,30 March
2012, ‘http://openeuropeblog.blogspot.com/2012/03/whos-afraid-of-big-bad-bailout-fund.html
[3] See Open Europe,’ who’s afraid of a big bad
bailout fund?’,30 March
2012, ‘http://www.openeurope.org.uk/Article/Page/en/LIVE?id=1672
[4][4] See Open Europe Blog,’ What is cheap ECB
liquidity actually solving?’,29
February 2012, http://openeuropeblog.blogspot.com/2012/02/ltro-no-2-of.html
[5]See Open Europe Blog, ‘A 'selective' Greek
default and some emergency liquidity’, 28 February 2012, http://openeuropeblog.blogspot.com/2012/02/selective-greek-default-and-some.html
[6] See Open Europe Blog, ‘The ECB loads up on
PIIGS exposure’, 20 April 2012, http://openeuropeblog.blogspot.com/2012/04/ecb-loads-up-on-piigs-exposure.html
[7] See Bloomberg,‘IMF's Vinals: ESM Needs
Direct Access to Europe's Banks’, 18 April
2012, http://www.safehaven.com/article/25109/imfs-vinals-esm-needs-direct-access-to-europes-banks
[8] Also see, article 5.6.d ESM – Treaty
[9] See Handesblatt, ‘ Wird
Deutschland Zahlmeister einer Europa-Regierung?’, 11 May 2012, http://www.handelsblatt.com/politik/konjunktur/nachrichten/stimmt-es-dass-wird-deutschland-zahlmeister-einer-europa-regierung/6618982.html
[10]
Furthermore, ESM critics have claimed that there is even a way to leverage the
ESM, which would make exposure to taxpayers more extensive and more likely.
They argue that as article 8 ESM Treaty states that in special circumstances,
newly issued capital shares can be issued on other terms than at par. Member states’ exposure are linked to the
issue price of ESM shares and not to the nominal number of 700 billion euro,
which allegedly circumvents the limit. Responding in an internal letter seen by
Open Europe to comments in this sense made by German liberal MP Frank
Schaeffler, the German Finance Ministry didn’t deny, but noted that a similar
arrangement was made for the European Bank for Reconstruction and Development
[EBRD). That doesn’t look like a valid comparison, given the fundamentally
different nature of the ESM compared to
the EBRD, as the former is constructed precisely to take on huge liabilities,
which should therefore be regarded in a much more critical way. See also FrankShäffler weblog, ‘ Hat das jemand
gelesen, als es unterschrieben wurde?’, 14 March 2012, http://www.frank-schaeffler.de/weblog/1913
[11] The
preamble now only states that private
sector involvement will be “considered”: “(12) In
accordance with IMF practice, in exceptional cases an adequate and
proportionate form of private sector involvement shall be considered in cases
where stability support is provided accompanied by conditionality in the form
of a macro-economic adjustment programme.” Also see Euro area debt crisis, ‘ESM
loses all its teeth’,7 December 2011, http://economistmeg.com/2011/12/07/esm-loses-all-its-teeth/.The
2011-draft of the European Stability Mechanism Treaty outlined detailed
provisions about the private sector involvement, allowing members to “take
initiatives aimed at encouraging the main private investors to maintain their
exposure”(Article 12). For further information, see the online version of the
ESM Treaty: http://www.scribd.com/PabloDRY/d/71849462-EU-Treaty-establishing-the-European-Stability-Mechanism-ESM-ENG
[12] Helsingin Sanomat, “Finland
prevails in ESM decision-making dispute”, http://www.hs.fi/english/article/Finland+prevails+in+ESM+decision-making+dispute/1135270254048 and Bloomberg,
“Euro Ministers Agree on ESM in Voting Compromise, Finland Says”, 25 January
2012 http://www.businessweek.com/news/2012-01-25/euro-ministers-agree-on-esm-in-voting-compromise-finland-says.html
[13] As the
Dutch Finance Minister has declared: http://www.rijksoverheid.nl/bestanden/documenten-en-publicaties/kamerstukken/2012/02/15/kamerbrief-over-noodreservefonds-esm/kamerbrief-over-noodreservefonds-esm.pdf
[14] For
further information, see report by the Dutch Finance Minister on the ESM: http://www.rijksoverheid.nl/bestanden/documenten-en-publicaties/kamerstukken/2012/05/07/antwoorden-op-kamervragen-incidentele-suppletoire-begroting-esm/antwoorden-op-kamervragen-incidentele-suppletoire-begroting-esm.pdf
[15] Article 8.5 of the ESM – Treaty states that “the
obligations of ESM Members to contribute to the authorised capital stock in
accordance with this Treaty are not affected if any such ESM Member becomes
eligible for, or is receiving, financial assistance from the ESM.”
[16] For
further information, see report by the Dutch Finance Minister on the ESM: http://www.rijksoverheid.nl/bestanden/documenten-en-publicaties/kamerstukken/2012/05/07/antwoorden-op-kamervragen-incidentele-suppletoire-begroting-esm/antwoorden-op-kamervragen-incidentele-suppletoire-begroting-esm.pdf
[17] See also article 4.8 ESM - Treaty
[18] See Open Europe
research, ’Out of Control? Measuring a decade of EU regulation’,February
2009,
[19]See Open Europe research, ‘Continental
shift:Safeguarding the UK’s
financial trade in a changing Europe’,
December 2011, http://www.openeurope.org.uk/Content/Documents/PDFs/continentalshift.pdf
[20] See also Credit Suisse research and analytics, ‘EFSF
(R)evolution: An analysis of the developing infrastructure of the EFSF and ESM,
16 August 2011, https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&document_id=804326740&source_id=em&serialid=OtY9EhZvgwxb53tmOyt21DVQZpT6XNymEqnLTTSYhI0%3D
[21] See Spiegel international, ‘China May Impose
Conditions for Helping Euro Zone’, 28 October 2011, http://www.spiegel.de/international/europe/investing-in-the-efsf-china-may-impose-conditions-for-helping-euro-zone-a-794575.html
[22] Also the
fact that 44 percent of the EFSF’s means are coming from governments, banks and
“sovereign wealth funds”, which is therefore also the case for the means coming
from Asia, should raise concern.
[23] See Financial Times, ‘China to Europe:
that’s a sure nice EFSF you have there’, 28 October 2011, ‘http://ftalphaville.ft.com/blog/2011/10/28/715586/china-to-europe-thats-a-sure-nice-efsf-you-have-there/
[24] See Irishtines, ‘Hollande
calls for ECB to lend directly to ESM fund’, 3 May 2012, http://www.irishtimes.com/newspaper/world/2012/0503/1224315513572.html. Similarly, German liberal MP Frank Schaeffler, the country’s most
prominent “euro rebel” has even claimed that the ESM – Treaty already provides
this possibility right now, through article 21.1, as this allows the ESM to
borrow from “other persons or institutions”. See Handelblatt, ‘Die Währungsunion hängt am
seidenen Faden’, 29 February 2012, ’http://www.handelsblatt.com/meinung/gastbeitraege/gastbeitrag-die-waehrungsunion-haengt-am-seidenen-faden/6227882.html
[25] MNI News, Germany's Government Still Opposes Direct ESM Aid For Banks,
30 May 2012, https://mninews.deutsche-boerse.com/index.php/germanys-government-still-opposes-direct-esm-aid-banks?q=content/germanys-government-still-opposes-direct-esm-aid-banks
[26] Eén
Vandaag, “Controle Europees noodfonds slecht geregeld”, 27
February 2012, http://www.eenvandaag.nl/economie/39854/controle_europees_noodfonds_slecht_geregeld Letter: http://www.eenvandaag.nl/uploads/doc/DOC001.PDF and Algemene Rekenkamer, “Algemene
Rekenkamer pleit voor verbetering controle ESM”, 27 February 2012, http://www.rekenkamer.nl/Nieuws/Nieuwsberichten/2012/02/Algemene_Rekenkamer_pleit_voor_verbetering_controle_ESM
