Eurozone crisis: ESM: a debt making machine

9 October 2012
Frankfurter Allgemeine Zeitung Frankfurt

With the launch of European rescue fund the ESM on October 9, the EU is betraying its founding fathers and their treaties. That it will stabilise the monetary union is also in doubt, laments FAZ, which strongly backs Germany’s policy of stability.

The exception has become the rule: the European rescue fund ESM is now joined at the hip to the European Monetary Union. Setting it up to get eurozone countries that cannot or do not want to play by the rules of the common currency out of their own messes, the Euro-rescuers have defied not only the promise of the founding fathers, but also the ban on bail-outs enshrined in the EU treaties. That shifts the power structure and the dynamics of the monetary union, probably not for the better.

For the young currency has now been taken up as the most important bargaining chip for cohesion: the credible threat that countries that fail to stick with fiscal discipline and fail to ensure that their economy is competitive will have to take responsibility for these shortcomings themselves. "Solidarity" is the new slogan. The joint liability is organised and institutionalised through the ESM, which can call on at least 500 billion euros in cheap loans. Even more can be leveraged off the funds.

A reckless path

The support will be tied to conditions whose present stringency won’t last long. Already, the countries that are accepting help or that want to accept it are playing a winning hand of poker for an easing up of the conditions. Spain, for one, would like to have some credits pumped directly into the ailing banks and so avoid having to make cuts at budget level or open up the labour market. The potential of the weak euro countries for extortion is large, and it will keep growing as long as the conviction prevails among European politicians that no eurozone country should be ejected from the club.

With the mighty euro funds there now begins a new chapter in the history of the monetary union. A highly politicised crisis fund has now joined the no longer quite so politically independent European Central Bank. Politicians mean to wield the two institutions – ECB and ESM – to curb the influence of the financial markets. The varied credit ratings of the euro countries should no longer be expressed in corresponding interest rates. That makes going into debt cheaper. It’s a reckless path: it may facilitate reforms in the crisis countries. However, it may also – and this is the voice of experience speaking – tempt them to live off credit for ever.

Translated from the German by Anton Baer

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