The European Stability Mechanism, the euro area’s rescue fund, would have enough firepower to save large economies if necessary, including Italy, the fund’s chief Klaus Regling said on Tuesday (29 October).
Italy’s high level of public debt and low growth represent a “serious issue”, Regling replied when he was asked whether the ESM would have the resources to rescue the country.
The Italian public debt reached around 138% of its GDP in the second quarter of this year, according to Bloomberg estimates, and its economy has grown at around half the eurozone average over the last 25 years.
But the Italian case is not comparable to the problems faced by Greece, Portugal, Ireland and Cyprus when they were bailed out after the euro crisis by the ESM and its predecessor, the European Financial Stability Facility (EFSF), Regling explained in the book presentation of the ESM’s brief history.
While the current account deficit of the rescued economies were between 10% and 15% of their GDP, Italy registers a surplus and doesn’t need to attract foreign capital.
“It is a completely different story,” Regling stressed, adding that he did not expect that Rome would lose access to international markets.
But in the “very hypothetical question of whether the ESM is big enough also to save big European economies, I can only say yes,” he added.
Currently, the mechanism has €410 billion available to lend in favourable conditions to eurozone partners. In addition, it could provide unlimited financing through the Outright Monetary Transactions programme jointly with the ECB.
“Financing is not really an issue if you think of a big crisis… we will never run out of money”, Regling explained.
Following months of dispute between Brussels and Rome, the new pro-European Italian government is willing to follow the Commission’s recommendations to reduce its public debt.
But the adjustments requested by the EU executive are putting the fragile coalition in a difficult situation.
During his opening remarks, Regling called for a central fiscal capacity for the euro area to absorb sudden shocks.
“Fiscal capacity for macroeconomic stabilisation is needed in my view, and I think in the view of all European and international institutions,” he said.
He argued that the “controversial” proposal, opposed by the Netherlands and others, could be designed without creating additional fiscal transfers.
But he went a step further as he said that the region should start thinking about an European safe asset.
Issuing eurobonds is still a more controversial issue than a eurozone budget, he admitted. But he argued that they would increase the volume of highly rated assets; would provide a common benchmark that could be used to price debt through the eurozone; would help to reduce banks’ exposure to national debt; and would be an important step to integrate markets and to make the euro more attractive for investors, therefore strengthening the international role of the single currency.
(Edited by Benjamin Fox)