Saturday, 15 May 2010

ECOFIN’s euro rescue

The statement by the heads of state or government of the euro area 25 March 2010 evoked the shared responsibility of all euro area members for the economic and financial stability in the eurozone. The leaders were willing to take determined and coordinated action, if needed.

They did not have to wait long for the need to arise, to which they responded by the statement of the heads of state or government of the euro area (7 May 2010), which we summarised in our previous blog post: Euro Group leaders rescuing the euro (15 May 2010).


The extraordinary meeting of the Economic and Financial Affairs Council (ECOFIN), representing the 27 EU member states, on 9 to 10 May 2010 (conclusions, document 9596/10) was left with the task to follow up on the soothing words of the national leaders in the eurozone with a credible package of deeds.

Greece, consolidation and structural reform

The ECOFIN Council decided on the support package for Greece, the establishment of a European stabilisation mechanism and a commitment to accelerate fiscal consolidation “where warranted”.

The ministers welcomed the “ambitious and realistic” consolidation and reform programme of Greece and promised the first disbursement of aid by the eurozone members by 19 May 2010.

Portugal and Spain promised to take significant additional consolidation measures in 2010 and 2011 and to present them at the 18 May 2010 ECOFIN Council. They were going to announce structural reform measures.

European financial stabilisation mechanism

The European financial stabilisation mechanism was established among EU27, based on Article 122(2) TFEU.

The conclusions reiterated the conditions for financial assistance: The EU faces exceptional circumstances beyond member states’ control.

The following sentence was slightly more ambiguous: We are facing such exceptional circumstance today …

Perhaps “such” can be seen as covering the ‘beyond control’ part as well, but not in a clear fashion.

Since conclusions from Council meetings are fairly brief summaries of main points, we often have to turn to Commission proposals and Council decisions for added detail; in this case the adopted Council Regulation.

Have the EU institutions argued transparently and convincingly with regard to the absence of control?

As stated in earlier blog posts, the Open Europe blog and Bruno Waterfield have accused the EU of outright lies, so a closer look is required in a matter of these proportions (€60 billion).

Special Purpose Vehicle

The complementing €440 billion “highly conditional” Special Purpose Vehicle was established between the governments of the euro area member states (through pro rata guarantees), and the International Monetary Fund (IMF) was expected to contribute by half as much.

The Commission was going to propose stronger measures for fiscal discipline and crisis resolution on 12 May 2010.

Measures on financial market regulation and supervision were promised.

My impressions

The ECOFIN conclusions were fairly strong verbally. Both eurozone members and EU27 showed a sense of purpose and commitment rarely achieved before.

The conclusions were meant to have a shock and awe effect on jittery markets, and for the first day or so the climate improved.

However, towards the end of the week the euro and stock prices plummeted among concerns about the unsustainable pace of sovereign debt accumulation and levels.

This is a familiar pattern: The member states (the European Union) invest heavily in a show of unity, followed by a short feel-good respite. Soon enough doubts and negative reactions set in, triggered by individual member state governments, opposition parties, trade unions and social disruptions, as well as doubts among pundits and major market players regarding all of the above.

This is another problem area we have to look at during the course of this series of blog posts on financial stabilisation in the European Union (eurozone).

Ralf Grahn