EU finance ministers agreed last night (9 May) to establish a mechanism - based on loan guarantees and issuing euro bonds - to bail out failing members of the bloc in future, in a move to reassure global financial markets of the euro zone's stability before they open today.
At another dramatic extraordinary meeting this weekend in Brussels, eurozone economy ministers managed to get the go-ahead from Germany to establish a rescue mechanism worth about €750 billion and meant to offer guarantees against the collapse of eurozone members while protecting the common currency.
There should not be a 'new Greece', according to the EU plans.
The new mechanism is composed of three parts. Up to €440 billion will be committed by eurozone member states as loan guarantees for collapsing states. The money will be offered as a promise and will only be disbursed if a debt-stricken eurozone country is unable to repay its debt.
The International Monetary Fund will contribute to the mechanism with a sum that is expected to be "half" of that pledged by member states, which sets a ceiling for the IMF of €250 billion.
The third tranche is made up of funds raised on financial markets by the European Commission to the value of €60 billion. The new Eurobonds, designed to help countries at risk of bankruptcy, will complement monies already raised by the Commission to help the balance of payments of non-eurozone countries.
The facility has been recently pumped up to a ceiling of €50 billion (see 'Background'). With the addition of an extra €60 billion, the idea of introducing European Community bonds is gaining increased momentum.
It remains to be seen what role the European Central Bank (ECB) will play within the mechanism. At the final press conference, EU Commissioner Olli Rehn, in charge of economic and monetary affairs, mentioned "significant measures" to be taken by the ECB.
The meeting of economy ministers went on until the early morning of today (10 May) and was interrupted several times to allow for bilateral meetings and let diplomats define a common text. In the last of the meetings, EU leaders themselves participated in the negotiations by phone.
According to EU sources, the ministers of the EU countries which are members of the G7 (France, the UK, Germany and Italy) held also two conference calls with their G7 counterparts, on the margins of Ecofin.
The meeting was also interrupted by the sudden illness of German Finance Minister Wolfgang Schäuble, who had to be hospitalised in Brussels and was replaced by his colleague, Interior Minister Thomas de Maizière.
The agreement followed a political deal reached by eurozone leaders in the early morning of Saturday (EurActiv 08/05/10).
Leaders, "taking into account the exceptional circumstances," mandated the European Commission to "propose a European stabilisation mechanism to preserve financial stability in Europe," read a common statement issued at the end of the extraordinary meeting in Brussels.
The legal basis of the mechanism is Article 122 of the EU Treaty, which reads: "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, on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the member state concerned".
On Wednesday, Ecofin ministers will meet again in Brussels for the first meeting of a task force to review the Stability and Growth Pact, Italian Economy Minister Giulio Tremonti announced at the weekend.
The German conundrum
The biggest stumbling block to the agreement was Germany's position, dictated in recent weeks by national political concerns.
However, the time for indecision is over. Ministers had to agree on a common plan before global markets opened today (10 May) to prevent a renewed massive attack by speculators, which could plunge the euro and EU markets to new depths.
German Chancellor Angela Merkel was less preoccupied with domestic public opinion. Merkel was heavily defeated in regional elections, which made her three-month delay of a common eurozone plan to save Greece and calm markets even more irrelevant.
Negotiations were nevertheless far from smooth, and Berlin fought hard for a number of red lines. Eventually the deal secured a watered-down mechanism that includes external support from the IMF, rather than relying purely on European funds. Berlin obtained a liquidity ceiling for the mechanism (€750 billion), which was originally meant to offer a limitless guarantee.
Spain and Portugal were asked to pursue extra measures to guarantee the viability of their public finances, and in particular their deficits.
For its part, Germany had to accept an increase of the ceiling for issuing Eurobonds. Berlin has always been against the idea of European bonds, fearing that it would be the biggest net contributor to such a plan.
Historically Germany ranks among the European countries with the most stable public finances, making it an unlikely beneficiary of the facility.
Germany was not alone in opposing the plan. The UK had made clear since the beginning of the Ecofin meeting that its support would be limited to its annual contributions to the EU budget, worth around €15 billion.
The fund will therefore be addressed only to eurozone members, which will in turn be the only countries to commit to it financially. The other EU members will not contribute national funding.
UK Chancellor Alistair Darling said at the beginning of the extraordinary meeting: "I want to be clear. The idea of establishing a euro stabilising mechanism concerns exclusively eurozone countries."
"We are placing considerable sums in the interests of stability in Europe," Spanish Economy Minister Elena Salgado told reporters in Brussels after chairing the 14-hour meeting.
"Spanish Finance Minister Elena Salgado has done a magnificent job tonight by securing agreement on the two main pillars of the PES crisis recovery plan through the establishment of a stabilisation fund and a European Monetary Guarantee," said Party of European Socialists (PES) President Poul Nyrup Rasmussen.
Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), issued the following statement on the European Union's announcement of sweeping measures to stabilise its economic and financial system:
"I strongly welcome the far-reaching steps unveiled today by the European Union and the European Central Bank (ECB) to restore confidence and financial stability in the euro area. These are strong measures that will help to secure global economic and financial stability, and preserve the global economic recovery. Implementation of actions to put public finances on a sustainable footing is key to restoring economic health in Europe."
"The IMF will play its part, in the interests of the international community, in addressing the current challenges. In particular, we stand ready to support our European members' individual adjustment and recovery programmes through the design and monitoring of economic measures as well as through financial assistance, when requested, in conjunction with the new European Stabilisation Mechanism (ESM). Our contribution will be on a country-by-country basis, through the whole range of instruments we already have at our disposal. We expect our financial assistance to be broadly in the proportion of our recent European arrangements."
- 18 May 2010: EU Ecofin Council.
- 17-18 June: European Council to agree common position for Toronto G20.
- 26-27 June: Fourth post-crisis G20 summit in Toronto.