Efforts to resolve the two-year-old European debt crisis swung back to world leaders after euro-area policy makers boosted a firewall designed to overcome doubts about their crisis response and to lure additional emergency aid.
Finance ministers from the 17-member monetary union unveiled a package over the weekend including 500 billion euros ($667 billion) in fresh bailout funds on top of 300 billion euros already committed to rescue programs, which together topped the symbolic $1 trillion mark. The total doubles when more than 1 trillion euros lent by the European Central Bank to aid the region’s banks is included.
“The political commitment to the eurozone is increasingly clear, and the ECB has shown that, in the final analysis, they’ll do what they have to do,” Erik Nielsen, chief global economist at UniCredit SpA, wrote in a note to clients Sunday.
Group of 20 nations that rebuffed German-led pleas for more aid in February will be asked to decide this month whether European leaders have done enough to warrant increased resources from the International Monetary Fund. Euro-area finance ministers insisted at a meeting that ended March 31 in Copenhagen that they’ve fulfilled their side of the bargain.
“Europe has done its part” and that augurs well for talks at the IMF spring meeting on April 20, French Finance Minister Francois Baroin said as he left the meeting in the Danish capital.
IMF Managing Director Christine Lagarde said March 30 that Europe’s upgraded strategy will “support the IMF’s efforts to increase its available resources for the benefit of all our members.” The same day, the U.S. Treasury said that Europe’s decision on financing will “strengthen confidence.”
“Today’s announcement by the Eurogroup reinforces a trajectory of positive efforts to strengthen confidence in the euro area,” the Treasury said in a statement in Washington.
With finance ministers offering differing arithmetic to defend the firewall, it was unclear whether emerging nations including China and India would be persuaded to help bolster the IMF’s anti-crisis war chest at the fund’s meeting.
The weekend gathering capped a first quarter in which euro-area leaders agreed on a fiscal treaty outlining new budget rules, completed a second bailout program for Greece and bolstered their bailout funding. Along with the ECB’s three-year loans, the activity helped to ease borrowing costs in the monetary union and calm markets.
Even as euro officials pledged to exploit the time they’ve bought with the measures, German Finance Minister Wolfgang Schaeuble criticized an excessive focus on the volume of bailout funding at the expense of structural overhauls like budget cuts and labor market changes.
“My irritation over a lot of stupid talk over the last few days has to do with the fact that it’s as if only the firewall is important,” Schaeuble told reporters in Copenhagen March 30. “You could have put in 10 trillion, but if you don’t solve the problem, it’s worth nothing.”
The meeting featured a spat as to which European minister would present the package to the media. Austria’s Finance Minister Maria Fekter later apologized for speaking before a scheduled press conference.
The increased euro firewall derives from the ability of the 500 billion-euro European Stability Mechanism, the euro-area’s permanent rescue fund scheduled to go into operation from July, to use fresh funding. Had ministers not acted, that figure would have been reduced by funds already committed by the temporary European Financial Stability Facility. (Bloomberg)
Forced Compromise
The new fund’s firepower fell short of a draft proposal to top it up with some 240 billion euros in EFSF funds not yet committed. Instead, that amount will only be used to ensure that the permanent ESM can lend its full 500 billion euros before it becomes fully resourced in two years.
The compromise was forced by a group of German-led creditor countries that balked at potentially 940 billion euros in overall bailout funds, saying that such a sum couldn’t be justified to their countries’ lawmakers and taxpayers.
“Finland is ready to increase the capacity, but 940 billion is not possible for our side ― it’s too high,” Finnish Finance Minister Jutta Urpilainen told reporters March 30.
It’s questionable whether the lesser amount will win over investors and G-20 leaders who have demanded bolder action from the euro area, according to Malcolm Barr, an economist at JPMorgan Chase & Co. in London. He said the funding was still too meager potentially to rescue Italy and Spain, which have combined borrowing needs of 800 billion euros in the next three years ― or to deal with additional bank recapitalizations.
Rich Enough
Europe’s move “is likely to be a disappointment not only to some within the euro area, but also to those outside who wanted to see ‘the color of European money’ before being prepared to commit more resources to the IMF,” Barr said Sunday in an e-mailed note.
At a meeting in Mexico City in February, the G-20 said that a European review of its backstop funding is “essential” before any consideration of bulking up IMF resources. Officials at that meeting, including those from Japan, Brazil, Russia and the U.K., sided with the President Barack Obama’s administration, which has said that Europe is rich enough to do more.
Euro-region national central banks plan to steer 150 billion euros to the IMF as a down payment toward other countries chipping in. That sum was left out of Europe’s firewall calculation because it would be managed by the global powers that run the Washington-based IMF.
