People are naturally getting nervous about this arrangement, particularly in Germany. Sueddeutsche suggested the other day that German taxpayers will need to contribute between €18bn to €25bn to the scheme in paid up cash (in addition to the guarantees).
Chancellor Angela Merkel isn't too keen on discussing how much Germany might have to contribute in the end. "She doesn't want to talk about this now", a diplomat reportedly said.
We can see why. A direct €25bn liability on Germany's books could increase the country's borrowing costs and hamper efforts to consolidate its budget.
To avoid this, the German government is pushing only for countries without a triple A rating to contribute paid-up cash, as triple A countries - so says Merkel - are lending their good name to the cause, and that's quite enough. But this, in turn, would increase the cash contributions from weaker eurozone members. This has raised alarm bells amongst weaker euro economies as well as a range of non-eurozone members.
Reuters yesterday quoted EU sources saying that eurozone members Estonia and Slovakia as well as Latvia, Lithuania, Bulgaria and the Czech Republic have all criticised the plans. They argue that basing cash contributions to the ESM on a country's proportion of the ECB's paid-up capital is unfair. The countries have even threatened to block proposals for tougher EU-wide budget rules unless changes are made to the suggested ESM arrangement. One representative said,
"Unless there is a change to the ESM capital key we will block the agreement on the governance package once it returns from parliament and EU finance ministers have to approve it by unanimity."Also non-euro member Sweden has objected to the proposed capital key for the ESM.
Why do these countries feel so strongly about this issue. They're not in the eurozone after all? Well, probably because they understand that, were they one day to join, they could be forced to cough up actual cash to save a Greece, Ireland or Portugal. Paid up cash is a far more serious liability than loan guarantees. Slovakia's refusal to take part in the Greek bail-out gives a hint as to why these countries aren't thrilled by the prospect of a permanent bail-out arrangement linked to the ECB's capital key and credit status. In such an arrangement, smaller economies that haven't really done anything wrong could end up with a pretty hefty bill.
On a related note, where is the UK in all of this? So far, the UK appears to have taken little interest in the structure and pay-in arrangement of the permanent bail-out mechanism. If this is because it doesn't intend to ever join the euro, that's one thing.
But if it's because Britain thinks it has no stake in making sure that the new eurozone rules are fair and make economic sense - rather than facilitating even greater meltdowns down the road (a very real risk) - then the UK government is sadly mistaken.
A meltdown followed by a break-up of the eurozone is precisely what we need -- at least, for my country, one of those which has suffered the most from the euro. If we manage to "muddle along" with bail-outs, anti-democratic rules and "economic governance," we'll be condemned to eternal austerity, a chronically slow economy, and the destruction of our social system -- all of which could be avoided by having our own currency, floating at its appropriate level. The UK, or, indeed, any other nation, would do us a great favour by NOT propping up the euro.
ReplyDeleteThanks J.E. - but the worst case scenario must surely be a chaotic meltdown, possibly leading to a break-up, following multi-billion euro bail-outs, leaving taxpayers which huge losses (in addition to again forcing taxpayers to prop up banks)...?
ReplyDeleteOrderly wind-downs or restructering (for banks, countries and even the euro itself if a break-up ever becomes a real possibility)is far better. This is what contries, including the UK, should design their euro contingency plans around.
Open Europe team:
ReplyDeleteThanks for answering. Of course I agree that an orderly unwinding of the eurozone would be preferable, but could it ever happen peacefully? From what I've seen, the establishment seems to be determined to prop up the euro no matter what -- even if it means one out of every five of my countrymen are going to remain unemployed for the foreseeable future, or that entire swathes of our industry, including the sector I work in, will continue to atrophy and shrink in the face of unstoppable German competition.
A meltdown would be painful, but sometimes it seems politicians will only see reality if it hits them in the face, don't you think?