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With a new bailout to rescue Greece from the immediate threat of default, the next pressing item on the save-the-euro agenda is to set up a trillion dollar firewall to defend other brittle economies from a Greek-style conflagration.Germany, however, is in no hurry.
Opposition from Berlin ensured there was no substantial discussion at this week’s meeting of European finance ministers on the plan to combine the 250 billion euros still in the euro zone’s temporary rescue fund with the new 500 billion euro European Stability Mechanism. Advocates say that doing so would create a firewall high enough to convince markets that the likes of Portugal and Spain are protected.
German Chancellor Angela Merkel and her Finance Minister Wolfgang Schauble have delayed a decision on the firewall until the end of the month.
They are seeking to reconcile international pressure to combine the funds, with domestic opposition to handing over more money on top of the 168 billion euros which Germany is already committed to set aside for the ESM’s callable capital.
Berlin wants to convince other European Union capitals that the 500 billion euro stability fund is sufficient.
Schauble cautions that over-protecting countries like Spain, Portugal and Ireland by pumping more money into the rescue fund could ease the pressure on them to reform their economies and get public finances in line.
The Germans are looking increasingly isolated, however.
“Reinforcement of the euro-area financial firewall is an indispensable element,” Olli Rehn, the EU’s economics commissioner said after euro zone ministers met Monday night, reflecting the widespread view at EU headquarters.
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Even Finland and the Netherlands, which have generally supported Germany’s distaste for throwing money at the euro crisis, are supporting the stronger firewall. They argue that a stronger rescue fund will reassure markets, making it less likely the funds will have to be used.
Beyond Europe, the United States and other leading world economies made it clear to Schauble at last month’s G20 meeting in Mexico that a stronger European firewall is a pre-condition for them to agree to increase the resources of the International Monetary Fund as an additional euro zone backstop.
A decision on the size of the firewall is now expected at a meeting of EU finance ministers in Copenhagen starting March 30.
Ministers at Tuesday’s meeting in Brussels expressed confidence the Germans would eventually give ground. In private however, diplomats said Schauble was still playing hardball, fearing a revolt among lawmakers back home. They also recalled that Germany has tended to get its way in most things since the start of the crisis.
Besides worries that Europe’s firewall will be too short, concerns are growing that its so-called six-pack is looking too flabby.
The six-pack groups six rules imposing fiscal discipline, through the threat of fines for nations that run up unauthorised deficits over 3 per cent of gross domestic product, or that fail to bring down debts towards a target of 60 per cent of GDP. They were adopted by EU nations last year. Spain however put the rules to the test when it announced last week it would miss its target of halving the budget deficit to 4.4 per cent this year.
At Monday’s meeting, ministers gave Spain some leeway. They set a new target of 5.3 per cent, instead of the 5.8 per cent Madrid had asked for, and insisted that the deficit would be cut to 3 per cent in 2013.
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The concern is that others will follow Spain in seeking an easing of the budget targets to avoid too much austerity snuffing out any hopes of revived growth. Leading opposition lawmakers in the Dutch parliament on Tuesday threatened to block the EU’s new fiscal treaty unless the country gets more time to reduce its deficit.
“The discussion on Spain was probably only the tip of the iceberg,” Carsten Brzeski, senior economist at the Dutch banking group ING, blogged Tuesday. “The big institutional litmus test for the euro zone will come next year when eight euro zone countries officially have to bring their fiscal deficits back under the 3 per cent threshold.”
Although they gave Spain a break, ministers did get tough on Hungary, threatening to freeze 495 million euros in economic support earmarked for 2013 unless the government of Prime Minister Viktor Orban agrees on budget cuts by June.
The meeting Tuesday made little headway on proposals for a financial transaction tax which the European Commission estimates could raise 57 billion euros a year by imposing a levy on stock, bond and derivative trades. France and Germany are back the idea, but Britain is leading opposition fearing an assault on the City of London financial centre.
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