From Berlin, via Reuters, on Monday morning:
GERMANY’S MERKEL SAYS WE MUST ADDRESS THE ROOT OF THE PROBLEM, THAT MEANS CONSOLIDATING BUDGETS
EURO GERMANY’S MERKEL SAYS THIS PACKAGE IS NECESSARY TO GUARANTEE FUTURE OF EURO
GERMANY’S MERKEL SAYS ATTACK ON EURO CONSTITUTES EMERGENCY SITUATION
Are we witnessing the first steps toward a fiscal union in the eurozone?
Morgan Stanley’s Elga Bartsch believes so. As she writes, emphasis FT Alphaville’s:
Like the ERM crisis in the early 1990s spurred on political initiatives to bring about the long-planned monetary union in Europe, it seems that the sovereign debt crisis could be acting as a catalyst for an ever closer union of European countries. The decisions taken this weekend first by European leaders and then by finance ministers mark a big leap towards a fiscal union in the euro area, we think.
Not only have countries agreed to stand in for each other in an unprecedented extent, they have also agreed to foregoing some of their fiscal sovereignty and submit to rigorous fiscal consolidation programmes should they require financial assistance.
Marco Annunziata, chief economist of UniCredit, agrees:
The new stabilization fund represents another step towards “passive” fiscal integration, that is member countries explicitly assuming joint responsibility for each other’s obligation. To avoid the risk of violating the no-bailout clause, this is done in the form of a pooling of resources to rescue member countries in stress and not formally shouldering their existing debt obligations; moreover, financial support would be extended only based on tough conditionality on adjustment measures. However, the substance is the same: member countries have to jointly put their resources at stake to support the weaker members.
The challenge now is to rebuild the “active” fiscal integration, starting with stronger and enforceable incentives for fiscal discipline, which might otherwise pushed to converge to its lowest common denominator by the irresistible forces of moral hazard. The IMF’s contribution to the fund is a revealing signal in this respect: use of the facility would most likely be accompanied by an IMF program to ensure a credible adjustment program. This is a positive feature, but also depressing confirmation that at this stage that the EU is unable to design and enforce conditionality on its own. The true decisions needed for the longer-term survival of the Eurozone still need to be taken.
To recap — the stabilisation fund will constitute up to €440bn of loans, provided by a newly created SPV that’s backed pro rata by the national government guarantees (and an additional €220bn of loans from the IMF).
The impact of that will largely be felt in the eurozone periphery, says Bartsch:
The impact of the stabilisation fund will likely be felt most acutely in the EMU periphery, for two reasons. First, these were the countries that experienced some funding stress, with bond yields rising fast and furiously. Second, these are the countries that would have to agree to aggressive austerity programmes – should they have to draw on the lending facilities of the fund.
For the record, Spain has to redeem €81bn of debt this year and Portugal €19bn, as the chart below shows:
Related links:
The dead wolf bounce - FT Alphaville
Europe’s QE is sterilised and sensitive - FT Alphaville
Central banks restart dollar swaps – FT Alphaville
Wolfpack watch - FT Alphaville