Eurozone rescue: Exceptional occurrences beyond control?

In ECOFIN’s euro rescue (15 May 2010), we noted that the conclusions of the extraordinary meeting of the Economic and Financial Affairs (ECOFIN) Council on 9 to 10 May 2010 (document 9596/10) reiterated the conditions for financial assistance.

Article 122(2) TFEU mentions natural disasters as a concrete example for EU financial assistance, but adds ‘or exceptional occurrences’. The scope is not restricted to natural disasters. If there are difficulties or there is a threat of severe difficulties, the provision is applicable in my view, despite the outrage expressed by Bruno Waterfield and the Open Europe blog.

Actually, the conclusions added a level of seriousness to the threat. Instead of referring to “a Member State”, the Ministers of Finance representing the 27 EU member states said that he EU [as a whole] faces exceptional circumstances beyond member states’ [all of them] control.

However, the conclusions did not elucidate how these occurrences were ‘beyond control’.


ECOFIN press conference



Did the press conference make things clearer?



A summary of the press conference on the web pages of the Spanish Presidency of the Council says that the loan package of more than 500 billion euros was allocated to cover the needs of members with solvency problems and to defend the euro.

The Spanish Minister of Economy and Finance, Elena Salgado, stressed that the extraordinary Ecofin meeting intended to set in motion financial stability mechanisms, as well as preserving financial stability in Europe, and in particular, in the Eurozone. The commitment to fiscal sustainability was reached to help the economic growth of all member states.

Commissioner Olli Rehn affirmed that “we are talking about the financial stability of the Eurozone as a whole”, and said that the European Commission has presented specific proposals to guarantee financial stability in Europe. Asked what was considered to be “exceptional cases”, Olli Rehn stated that “in the Eurozone there have been systematic attacks, which is considered to be exceptional circumstances that prove to be too much for the affected member state".


My impressions

Bruno Waterfield asserted (and the Open Europe blog applauded) that the crisis was created by human agency, not unforeseen events.

My impression is that the causes are more complex than that.

Even the best public finances were affected by the global financial crisis and the severe economic downturn. Reckless actions by financial institutions were not prevented through existing, underdeveloped financial regulation and inefficient supervision, especially in cross-border cases.

Politicians at national and EU level are partly responsible for their deference to ‘self-regulation’ and ‘light-touch regulation’ lobbied by financial markets.

The public finances (and taxpayers) ended up with the bill. They (we) are still reeling from the effects. In this sense, the sovereign debt problem was largely caused by human frailty.

The pace of debt accumulation in some of the EU member states and the levels of public debt are not sustainable without corrective measures. The states were only beginning to contemplate exit strategies when the markets started punishing the weakest links by driving the bond prices sky-high.

Many of the EU member states proudly announced that the Lisbon Treaty left economic policy in the hands of national governments, so they can be blamed for short-sightedness.

Greece faked the entry into the eurozone as well as the annual exams. In this, human agency can be blamed, including the lack of supervisory powers.

Greece, Spain and Portugal (as well as others) had not been able to make necessary structural reforms to their tax systems, business regulation, labour markets, pension systems etc. during the decade of the Lisbon strategy for growth and jobs. The price tag is beginning to emerge. Unpalatable solutions are now forced upon governments and populations more harshly and suddenly than before.

Reactions or over-reactions, the financial markets suddenly precipitated a severe crisis, which threatens not only the “sinners”, but the euro currency and the European Union as a whole (contagion).

I am willing to buy Olli Rehn’s argument that these are exceptional circumstances and that their effects have proved to be too much for the affected member states.

If a ship starts taking in water during a storm, you have to man the pumps, but you cannot stop work to call a meeting to discuss if a different course could have prevented the disaster. You have to deal with the consequences without delay.

You need to discuss the lessons to be learned – later.

It has been said that debt cannot be paid off by more debt. Is it as simple as that?

By mounting a common defence for the common currency, the EU member states have forged an alliance stronger than its weakest links.

Many questions remain, and the danger is far from over.




Ralf Grahn

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).



ECOFIN



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