Double standards on leverage

The excellent WSJ Real Time Brussels blog notes that EU Budget Commissioner Janusz Lewandowski isn't entirely happy with the amount of money that potentially can be lent to struggling governments, using the EU budget as a guarantee.

Mr. Lewandowski told a group of journalists: "That is worrying me...[the EU must] be realistic about the budget as a guarantee." In case of danger, he said, "we should be very watchful" about the maturities of the various pieces of debt issued to countries.

So what exactly is the Big Lewandowski on about?

Well, besides the €440 billion eurozone bailout package, which does not include the UK and is guaranteed by eurozone governments, the EU also agreed in May to a separate €60 billion fund. This fund is to be raised by the Commission on the markets, and then lent to eurozone countries in trouble, using the EU budget as collateral. The loans would therefore be guaranteed by all member states, including the UK, since all member states pay into the budget.

Added to the pre-existing fund for non-eurozone members, which totals €50bn, the EU budget can therefore potentially be used as a guarantee for €110bn in loans. And given the state of the economies on the receiving end, these loans can only be described as sub-prime (with some exceptions).

The size of the EU budget is roughly €123 billion euros this year (set to rise by €7 billion if MEPs get their way), so should countries max out these bailout funds, the bloc's debts could reach 89% of its equity (the EU budget).

Ironically, the Stability and Growth Pact stipulates that no EU country is allowed to have a debt higher than 60% of GDP. We know it's not the same thing, but Lewandowski is certainly making a good point. €110 billion is actually massive exposure.

In addition, isn't this potentially causing the EU - as in the legal entity not individual countries - to break the very same rules that the Commission now wants to beef up?

But then again, on leverage as well as fiscal prudence, the EU isn't exactly known for leading by example.