Monday, 24 May 2010

Tracking eurozone crisis measures: Collective defence doctrine and foundations

How do the heads of state or government of the eurozone countries add to our knowledge about crisis prevention and mitigation at the time of the Spring European Council?

Statement by the heads of state and government of the euro area; Brussels, 25 March 2010


The participants stated that ‘ambitious and decisive’ action by the Greek government should allow Greece to regain the full confidence of the markets. Greece had not requested financial assistance, so no decision was taken to activate such assistance.

The euro area member states reaffirmed their willingness to safeguard stability in the euro area as a whole.

However, the eurozone member states outlined an aid package, should the market disturbances continue or deepen:

As part of a package involving substantial International Monetary Fund financing and a majority of European financing, Euro area member states, are ready to contribute to coordinated bilateral loans.

This mechanism, complementing International Monetary Fund financing, has to be considered ultima ratio, meaning in particular that market financing is insufficient. Any disbursement on the bilateral loans would be decided by the euro area member states by unanimity subject to strong conditionality and based on an assessment by the European Commission and the European Central Bank. We expect Euro-Member states to participate on the basis of their respective ECB capital key.

The objective of this mechanism will not be to provide financing at average euro area interest rates, but to set incentives to return to market financing as soon as possible by risk adequate pricing. Interest rates will be non-concessional, i.e. not contain any subsidy element. Decisions under this mechanism will be taken in full consistency with the Treaty framework and national laws.

We reaffirm our commitment to implement policies aimed at restoring strong, sustainable and stable growth in order to foster job creation and social cohesion.

Furthermore, we commit to promote a strong coordination of economic policies in Europe. We consider that the European Council must improve the economic governance of the European Union and we propose to increase its role in economic coordination and the definition of the European Union growth strategy.

The current situation demonstrates the need to strengthen and complement the existing framework to ensure fiscal sustainability in the euro zone and enhance its capacity to act in times of crises.

For the future, surveillance of economic and budgetary risks and the instruments for their prevention, including the Excessive Deficit Procedure, must be strengthened. Moreover, we need a robust framework for crisis resolution respecting the principle of member states' own budgetary responsibility.

We ask the President of the European Council to establish, in cooperation with the Commission, a task force with representatives of Member States, the rotating presidency and the ECB, to present to the Council, before the end of this year, the measures needed to reach this aim, exploring all options to reinforce the legal framework.

From Greece to collective defence doctrine

It is remarkable that the most significant outcomes at the Spring European Council were not brought about by the institution, but cooked up at the margins, by a gathering even more informal than the Euro Group.

The national leaders of the eurozone countries proclaimed the doctrine of ‘collective defence’ for the common currency.

They were not willing or able to take the detailed decisions on mutual aid, but they laid the foundations for lending at average rates of interest:

• Intergovernmental, decisions requiring unanimity
• By euro area member states
• Minority participation but leading role for the International Monetary Fund (IMF)
• Coordinated bilateral loans
• Conditionality
• Assessment by the European Commission and the ECB
• Country shares based on ECB capital key
• Loans bearing interest, not subsidised
• Unspecified incentives for return to market financing of sovereign debt
• National legal and budget decisions as needed

There are limits to what the EU member states or the euro area countries can do within the treaty framework. It is something of an irony that for more profound action they have to resort to classical intergovernmental cooperation.

Did the markets doubt the ability of the euro area members to walk the talk?

Did the markets distrust the Greek government’s promises, or did they bet on Greece going broke anyway (with, perhaps, a gentle push)?

Soon enough the eurozone countries were going to wake up to the fact that both the Greek economy and the euro currency itself faced an existential threat. They could give up resistance or they had to bring out the big guns.

Ralf Grahn