Choices on Greece and the future of the euro must be settled within weeks
Fiscal union and shared responsibility are now being proposed for discussion
The goals are to put in place powers for the eurozone's €440bn rescue fund
The window for resolving the eurozone’s sovereign debt crisis is closing more quickly than policymakers anticipated.
Choices on Greece and the future of the euro that were once considered a long way off now must be settled within weeks.
Eurozone governments, many facing growing public disquiet, must now address three overlapping policy discussions for stepping up their response to the crisis. Once-unthinkable proposals for fiscal union and shared responsibility for sovereign debt are now being hurriedly readied for ministerial discussion.
Senior European officials hope that by the time of a summit of European Union leaders in October, they will have: put in place powers for the eurozone’s €440bn rescue fund; agreed on the need to expand the fund’s firepower; and presented plans for further economic integration. But policymakers still have to work out countless disagreements that could doom the process.
1. A rescue fund with extra tools
The most immediate task facing European leaders has been on the front burner for more than two months: getting all 17 eurozone parliaments to approve the overhaul of the European financial stability facility, the bloc’s rescue fund.
Once resisted by Germany and the Netherlands, among others, they are now seen as essential to dealing with the two things that most threaten the survival of the eurozone: a meltdown of the banking system, perhaps starting in France, and a run on Italian and Spanish bonds.
Under the overhaul, the EFSF would be able to inject capital into banks and purchase bonds of distressed governments on the open market, lowering borrowing costs and giving capitals more time to implement reforms.
The politics of the overhaul have begun to get tricky. Although six parliaments have approved the measures, Finland – the most ornery of the eurozone’s six triple A rated members – is to vote on Wednesday, and passage is not assured.
All eyes then turn to Thursday’s vote in Germany, where Angela Merkel, the chancellor, has the support of opposition parties but faces a revolt from within her own coalition. “If any triple As step out, I think it’s a dead deal,” said one senior EU diplomat.
Then there is Slovakia, where political opposition is strongest. “There’s a huge impatience in the bigger member states and they’re really, really upping the pressure,” said Sony Kapoor, head of
Re-Define, an economic consultancy that has worked with eurozone governments. If Slovakia fails to approve the deal, it may not be fatal but is likely to increase calls from other sceptical nations looking for opt-outs.
Mujtaba Rahman, Europe analyst for the Eurasia Group, said the biggest risk now was that EFSF powers would be diluted in the national parliaments in legislative horse-trading, drastically reducing their effectiveness. Already, the German Bundestag has insisted having approval rights over EFSF actions.
There has been a renewed push by some eurozone officials, particularly within Germany, to re-examine a larger-scale “haircut” for Greek bondholders once the new EFSF powers are in place next month.
Many officials in Brussels and at the European Central Bank have resisted such moves, but some in Berlin believe the new EFSF powers will enable leaders to “ringfence” Greece and protect other struggling countries and European banks.
“That’s what the moderates in Germany would like to see,” joked a senior European official. But such support for a quick and hard default is limited and most officials believe it is unlikely.
2. Boosting the rescue fund’s firepower
For the EFSF to perform effectively its new duties, eurozone leaders have finally acknowledged that the fund – originally set up as a temporary facility to deal with small peripheral economies – is no longer big enough for its new tasks. Bail-outs for Ireland, Portugal and Greece have reduced usable EFSF guarantees to about €250bn ($336bn). Many contributing countries are now unable to increase their commitments for political reasons or because they could jeopardise their own credit ratings.
Instead, leaders are debating at least five different proposals on how to make EFSF money go further, mostly by leveraging the available remaining cash. One proposal is for the EFSF to guarantee losses of up to 20 per cent on sovereign bonds, for example of Spain and Italy, rather than buying the bonds outright. Such insurance would increase the value of EFSF support by five times and avoid upfront payments. Another variant would speed up by a year the creation of the EFSF’s replacement, the permanent European stability mechanism, which was originally to come into place in mid-2013.
Mr Kapoor says they fall along a spectrum, from relying on the EFSF alone to find ways to increase firepower to looking to the ECB to do most of the heavy lifting.
Unlike the EFSF, which is funded through guarantees, a large portion of ESM funding will come from paid-in capital from member states, money that could then be more easily leveraged in the financial markets. Proposals that rely more on the ECB include turning the EFSF into a bank and allowing it to borrow money from the ECB, a nearly unlimited reserve. The plan has been criticised by the Bundesbank, however. Another version would keep the ECB purchasing sovereign debt as it now does but have the EFSF guarantee the bond purchases, moving potential losses to the fund rather than the ECB.
A broader restructuring of Greek debt is not likely until one of the new leveraging proposals is in place, and officials are divided over how long it could take. Eurozone finance ministers are likely to discuss proposals next week, and EU leaders could set out principles at their October summit.
But getting the new plans in place could require another round of parliamentary approvals, which could push off their implementation – and plans for a restructuring of Greek debt – for months.
3. Closer economic integration and moves towards fiscal union
Eurozone leaders will also start debating wider-ranging reforms to establish more centralised EU authority over national economies. Herman Van Rompuy, the European Council president, will outline proposals at the October summit, including ideas for an EU finance minister and new bonds collectively backed by all 17 eurozone countries.
Instead, much recent debate has focused on whether a new round of treaty changes would be needed to implement the reforms. Opinion is highly divided, with several countries, including the UK, concerned that a wide-ranging debate on new EU treaties could lead to acrimonious fights within each member state that could destabilise the union.
“Treaty change at this stage would be very dangerous,” said one senior EU diplomat.
Some officials have argued that the eurozone already has authority to make big changes under the just-implemented Lisbon treaty, which gives the eurozone the authority to “strengthen the co-ordination and surveillance of their budgetary discipline”. But European Commission lawyers are dubious, and officials said Germany was pressing hard for new treaties to enshrine tough rules that would prevent profligate members from undermining the currency.
Although collectively backed “eurobonds” are expected to be included in the debate, several officials noted that any move to pool risk would implicitly rely on Germany’s strong economy and credit rating – in return giving Berlin unparalleled authority to push for tough new treaty rules in exchange.
Sept 27 Greek parliament votes on unpopular new property tax
Sept 28 Finnish parliament votes on new powers for the European financial stability facility, the eurozone bail-out fund
Sept 29 German parliament due to ratify the EFSF, but will Chancellor Angel Merkel win over her coalition partners?
Oct 3 Eurozone finance ministers meet in Luxembourg
Oct 11 Slovak parliament votes on the EFSF, the last eurozone member to do so
Oct 13 Eurozone ministers could meet again to sign off on a Greek aid tranche
Oct 14 G20 finance ministers meet in Paris
Mid-Oct Greece starts to run out of money
Oct 17-18 Herman Van Rompuy, European Council, president, will make proposals on fiscal union at an EU summit
Nov 3-4 G20 summit in Cannes
Dec Talks begin on next aide tranche for Athens
Dec 9 EU summit at which leaders to discuss increasing EFSF at summit and fiscal union
Early 2012 German parliament votes on a permanent bail-out fund to replace the EFSF