So just another week in Europe which means yet another summit. This time it is in Copenhagen where the main topic on the agenda will be the expansion, or lack thereof, of the European firewalls.
If you’re having deja vu don’t worry, we have been here before, and as I explained then the combination of the EFSF and ESM sounds great in theory but when you get down to the detail it becomes quite underwhelming given the challenges Europe is likely to face this year.
You may note that although the fin-min meeting could only agree on a 500 billion Euro lending capacity for the combined ESM/EFSF the ESM actually has “technical” capital stock of 700 billion euros. I say “technical” because the fund is supposed to consist of 80 billion euros of paid-in capital, which isn’t actually paid-in at all, and 620 billion Euros of callable shares. Just don’t ask exactly where they are callable from!
And the other problem, which I have also explained previously, is that countries receiving funding out of any of these facilities are tied to the same failing one-sided policy that has led to the default of Greece and continues to drive Portugal, Spain, Ireland and Italy in the same direction:
Any financial assistance to a country in need is linked to very strict policy conditions which are set out in a Memorandum of Understanding (MoU) between the country in need and the European Commission. For example, conditions for the Irish programme include strengthening and overhaul of the banking sector, fiscal adjustment including correction of excessive deficit by 2015 and growth enhancing reforms, in particular of the labour market.
Sounds familiar doesn’t it ?
It is also important to understand that the EFSF is not a charity. It issues loans to struggling nations that must be paid back with interest and these loans are the collateral for the EFSF bonds. As the EFSF is guaranteed by other participating European nations, at a time of default it is up to those nations to meet the obligations of those bonds including ALL interest payments. It is that last point that shocked the Finns who seemed to have neglected to read the fine print on the legislation that they ratified.
Which is where Europe always seems to come unstuck. After covering the topic for over 2 years, it appears to me that European member states realise that a monetary union without a fiscal, and therefore political, union is the root of their problems yet they seem unable, or unwilling, to take the steps required to move Europe in that direction.
It really isn’t difficult to see that the combination of the EFSF and ESM is just a poor-man’s eurobond because ultimately the responsibility of a failing member state under these programs will fall back upon the stronger states, as we saw with the Greece default. However, for a myriad of intra-national political reasons Europe appears to be unable to explain that point to its own citizenry, and so we inevitably end up with some half-baked solution to every problem.
Which leads me to my expectations of the Copenhagen meeting. I hope to see something definitive but, I suspect we will just get some political concessions from Germany so that the EFSF doesn’t roll-over into the ESM, but is added to the top. This would mean that we see the “combined” fund expand of €710bn, leaving the ESM’s funds of €500bn available for new initiatives. The problem is, of course, that this isn’t really enough to handle the next cab-of-the-rank, Spain.
Obviously concerns about Spain aren’t new to MacroBusiness readers, but it is interesting to note Mario Monti’s recent words about the country:
Italy’s Prime Minister Mario Monti warned that Spain could reignite the European debt crisis as euro-area ministers this week prepare a deal to strengthen the region’s financial firewall.
Monti pointed to Spain’s struggle to control its finances ahead of a finance ministers meeting in Copenhagen starting on March 30, where officials will seek agreement to raise a 500 billion-euro ($664 billion) ceiling on bailout funding.
“It doesn’t take much to recreate risks of contagion,” Monti said during the weekend at a conference in Cernobbio, Italy. Days after his Cabinet approved a bill to overhaul Italy’s labor laws, Monti praised Spain’s efforts to loosen work regulations while advising it to focus on cutting the national budget. Spain “hasn’t paid enough attention to its public accounts,” he said.
Given those comments I think it is fairly clear that he understands that once Spain goes down so does his own country. Spain, however, maybe about to be handed something very helpful in the form of the presidency of the ESM:
Spain appears well-placed to obtain the presidency of the eurozone’s permanent rescue fund ESM amid a redistribution of top posts in Europe, a European official told AFP on Sunday.
“It’s a real possibility,” a source speaking on condition of anonymity said on the sidelines of an informal meeting of senior European officials in northern Finland.
That may well provide some leverage for Spain but , given Europe’s recent history , I still expect to be underwhelmed by the outcomes of this week’s summit. Here’s hoping for an upside surprise.