by Frank Schäffler, a Member of the German Parliament for the Free Democratic Party (FDP). He has served in this role from 2005 until 2013 and since 2017.
When the German Bundestag approved the European Stability Mechanism (ESM) eight years ago, this decision was preceded by an intense debate in Germany. For its supporters, the ESM was an expression of “European solidarity”. Their idea was: support in return for reforms. Countries that wanted to receive loans from the ESM had to respect strict conditions, which involved painful cuts to national social spending. For the others, the ESM was a violation of the “no bailout rule” in the European treaties, which provided that no member state should be liable for the debts of another member state.
With Greece’s first bailout, the temporary bailout fund EFSF and that the permanent bailout fund ESM, the original setup of the euro has increasingly been undermined. Today, these bailout schemes provide for public debt mutualisation in the Eurozone, even if they are limited. From the 500 billion euro lending volume, 89.9 billion euro is currently being lent out (59.9 billion euro to Greece, 23.7 billion euro to Spain and 6.3 billion euro to Cyprus), on top of another 174.6 billion euros through the temporary bailout fund.
The ECB’s abilities are incomparably greater. Therefore, it is not surprising that the ESM has lost its appeal. Ultimately, it weren’t the bailout loans and bailout funds that saved the euro and the monetary union as a whole, but the ECB’s interventions. The ECB truly acts as the euro’s guarantor of last resort. It believes its clout is unlimited. Mario Draghi’s promise to do “whatever it takes” has illustrated this implicit guarantee. This ensures the solvency of those Eurozone states that are in a crisis until today.
The former ECB President made this promise back in the Summer of 2012. More recently, the ECB bought up €2.7 trillion in debt from States, banks and companies, paid for with newly printed money. Through its bond-buying programs, the ECB keeps interest rates low, even long term rates. The ECB has meanwhile bought 16.1 billion euro of debt from Greece, 360 billion euro from Spain and 4.2 billion euro from Cyprus, pushing down bond yields of those countries that already received a bailout from Eurozone emergency funds.
Ten-year Greek bonds currently yield 0.69 percent and Spanish bonds as little as 0.1 percent. The ESM’s borrowing rates are higher, at 1.4 and 0.9 percent, respectively. As a result, deeply indebted countries have an incentive to strip off ESM conditionality and get rid of ESM loans as quickly as possible. For new program countries, there is no incentive to enter any bailout umbrella, given that the ECB ensures they can borrow at cheap rates. The best proof of this is the ESM’s pandemic program, which was launched last Spring, offering extra favorable conditions, for which not a single country so far applied.
In this environment, European finance ministers have now agreed on an overhaul of the ESM treaty, which will also need to be ratified by the German Parliament this spring. The changes to the treaty foresee that the ESM may also grant precautionary credit lines to governments without conditions and finance the resolution of ailing banks with taxpayers’ money.
Both would be a paradigm shift.
Granting precautionary credit lines to governments contradicts the original principle that any aid would only be possible in return for reforms.
The second change – financially supporting the resolution of ailing banks -had been ruled out until now, because of the idea that if there had to be bailouts, it should be for member states, not for banks.
Now these red lines are being crossed.
It can be suspected that this opens the door to the ESM being used at the next opportunity to wind down ailing banks in southern Europe.
According to official data, 35 percent of bank loans in Greece are non-performing, i.e. they are not being serviced or are no longer being serviced adequately. In Cyprus, that ratio is 16.9 percent, and in Italy 6.7 percent (In Germany, it is only 1.1 percent).
Writing off these loans costs would erode the capital of these banks, something which they really lack. The owners or creditors would need to step in. Therefore, the easier way is to use the ESM.
When at the beginning of the Euro crisis in Spring 2010, Greece had been saved from sovereign insolvency and an exit from the Euro area, which would have been likely, European heads of state and government unanimously stressed the “one-off” nature of these measures.
Since then, however, we find ourselves on a slippery slope. The interventions of both states and the European Central Bank is taking on ever greater dimensions. In fact, they continue unabated. With the “Next Generation EU” recovery fund, a new shadow budget is now being created at the EU level, which is allowed to take on more than 750 billion euros in debt. This means that the ban for the EU to take on debt is being scrapped. No one is currently asking the question where this is supposed to end. However, prosperity cannot be created through debt, and the principle “necessity knows no law” will not make European countries grow closer. Therefore, a reversal is needed. Let’s start with the ESM. Nobody needs it any longer.
Originally published by Prometheus Institut.
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