The FT’s Wolfgang Münchau, unimpressed:
…Ignore the headlines. This is not an increase in the eurozone’s rescue fund to €700bn. The reality is that the eurozone’s new fund, the European Stability Mechanism, will have €500bn available for future crisis programmes. The €700bn is a meaningful metric only for parliaments of member states because it outlines their risk exposure. It is not a forward-looking measure.
The best aspect of last week’s agreement was that it confirmed €500bn will be available, more or less, from day one of the next crisis. But behind that simple statement lies a complex construction where the unused funds from the old mechanism are used to balance a shortfall due to the gradual build-up of capital in the new one.
The essence of the new agreement, however, is refreshingly simple. The €500bn will have to pay for everything. The existing programmes continue but once they expire, or are restructured, any new funds will have to come from below this ceiling. You could say that the ESM was not really raised from €500bn to €700bn but from €300bn to €500bn.
How much will €500bn buy? If one assumes that the IMF will increase its share of the total package proportionately, the total available for new programmes will be €750bn. This would have to pay for second programmes for Portugal and Ireland, a third programme for Greece and probably a first and second programme for Spain (the first being a narrow one focused on the recapitalisation of the banking sector).
The enlarged ESM should be able to handle a subset of those, but will have no headroom left. If Spain were to fall into a deep and prolonged recession, as I expect it will, debt levels will rise and with them the eventual probability of a fully fledged programme. Once Spain is in that position, pressure on Italy and Belgium will rise as well.
The ESM enlargement – if you want to call it that – is big enough to deal with the immediate and the clearly foreseeable problems. But it is not of sufficient size to cope with more distant and unexpected events, which of course is its whole purpose.
Jens Weidmann, president of the Bundesbank, was right when he said you cannot solve the eurozone crisis through a rescue fund. But an enlarged ESM would have given the rest of the world reassurance that the eurozone is serious in its efforts to solve the problem. That is now not the case.
One reason for this exercise was to persuade the G20 to authorise a proportional increase in IMF support for the eurozone. Should the 20 nations agree, as eurozone leaders were quick to demand on Friday? I think not…
He’s right. The members of the Eurozone’s political class should be made to face up to the consequences of their irresponsible and dangerous gamble on a single currency that never could fit all. €500 billion (remarkably) is not, at this stage, enough to fix matters…and nor is pretending that things can continue as they are.