European Financial Stabilisation mechanism

After a meeting in Brussels lasting more than eleven hours, which finished in the early hours of Monday 10 May, the Economic and Financial Affairs Council (Ecofin) reached an agreement on a European Mechanism of financial stabilization. The mechanism includes an aid facility to balance of payments to a value of 60 billion euros, with the Union's own resources as guarantee, plus 440 billion in loans or guarantees supplied by the Eurozone member states, as well as 250 billion from the International Monetary Fund (IMF).

The financially most solid Member States of the euro area will be able to guarantee the loans of the most fragile States or to grant bilateral loans to them. The IMF will provide at least half as much as the EU contribution. The Commission will play the role of banker, borrowing on its behalf with the guarantee of the Member States and lending the money to the countries in difficulty.

The agreed aid package will be added to the 110 billion euros that has been assigned to the rescue of Greece, which the Europeans and the IMF will begin to pay out immediately.

Conclusions of the extraordinary Economic and Financial Affairs Council, Brussels, 9/10 May 2010

''The Council and the Member States have decided today on a comprehensive package of measures to preserve financial stability in Europe, including a European Financial Stabilisation mechanism with a total volume of up to € 500 billion.

In the wake of the crisis in Greece, the situation in financial markets is fragile and there was a risk of contagion which we needed to address. We have therefore taken the final steps of the support package for Greece, the establishment of a European stabilisation mechanism and a strong commitment to accelerated fiscal consolidation, where warranted.

First, following the successful conclusion of procedures in euro area Member States and the meeting of euro area Heads of State or Government, the way has been cleared for the implementation of the support package for Greece. The Commission has signed today, on behalf of the euro area Member States, the loan agreement with Greece and the first disbursement will proceed, as planned, before 19 May. The Council strongly supports the ambitious and realistic consolidation and reform programme of the Greek government.

Second, the Council is strongly committed to ensure fiscal sustainability and enhanced economic growth in all Member States and therefore agrees that plans for fiscal consolidation and structural reforms will be accelerated, where warranted. We therefore welcome and strongly support the commitment of Portugal and Spain to take significant additional consolidation measures in 2010 and 2011 and present them to the 18 May ECOFIN Council. The adequacy of such measures will be assessed by the Commission in June in the context of the excessive deficit procedure. The Council also welcomes the commitment to announce by the 18 May ECOFIN Council structural reform measures aimed at enhancing growth performance and thus indirectly fiscal sustainability henceforth.

Third, we have decided to establish a European stabilisation mechanism. The mechanism is based on Art. 122.2 of the Treaty and an intergovernmental agreement of euro area Member States. Its activation is subject to strong conditionality, in the context of a joint EU/IMF support, and will be on terms and conditions similar to the IMF.

Art 122.2 of the Treaty foresees financial support for Member States in difficulties caused by exceptional circumstances beyond Member States' control. We are facing such exceptional circumstance today and the mechanism will stay in place as long as needed to safeguard financial stability. A volume of up to € 60 billion is foreseen and activation is subject to strong conditionality, in the context of a joint EU/IMF support, and will be on terms and conditions similar to the IMF. The mechanism will operate without prejudice to the existing facility providing medium term financial assistance for non euro area Member States' balance of payments.

In addition, euro area Member States stand ready to complement such resources through a Special Purpose Vehicle that is guaranteed on a pro rata basis by participating Member States in a coordinated manner and that will expire after three years, respecting their national constitutional requirements, up to a volume of € 440 billion. The IMF will participate in financing arrangements and is expected to provide at least half as much as the EU contribution through its usual facilities in line with the recent European programmes.

At the same time, the EU will urgently start working on the necessary reforms to complement the existing framework to ensure fiscal sustainability in the euro area, notably based on the Commission Communication to be adopted on 12 May 2010. We underline the importance that we attach to strengthening fiscal discipline and establishing a permanent crisis resolution framework.

We underlined the need to make rapid progress on financial market regulation and supervision, in particular with regard to derivative markets and the role of rating agencies. Furthermore, we need to continue to work on other initiatives, such as the stability fee, which aim at ensuring that the financial sector shall in future bear its share of burden in case of a crisis, also exploring the possibility of a global transaction tax. We also agreed to speed up work on crisis management and resolution.

We also reiterate the support of the euro area Member States to the ECB in its action to ensure the stability to the euro area.''

Evaluation of the European Financial Stabilisation mechanism

It is evident that the European Financial Stabilisation mechanism was conceived under the pressure of the American credit rating agencies (Moody's, Standard & Poor's and Fitch Ratings) and the speculators on the global credit and money markets, who were battering Greece, Spain, Portugal and other euro countries. The conclusions of the extraordinary Council are the product of 27 tired Ministers (and their aids), having bargained 11 hours until early Monday morning and hastening to calm the markets, which were already opening in Asia. Therefore, the conclusions suffer from inconsistencies, ambiguities, repetitions and uncertainties.

On top of the ambiguities of the text, the first question which arises is why it took so long from the first signs of the crisis in Greece, in November 2009 until mid-May 2010 to conceive a mechanism, which is basically simple and obvious and could have been propounded at least in the beginning of 2010 [see The euro area and the Greek case]. Why did the Ministers belatedly remember Article 122.2 of the Treaty, which foresees financial support for Member States in difficulties caused by exceptional circumstances? The answer is of course ''party politics'' of Germany and some other countries, which have focused attention on the problems of Greece and wanted to chastise this country, neglecting the problem of the euro area as a whole [see Greek crisis and European solution]. It is now obvious that by attacking the weak members of the area, the speculators were in fact aiming at the weakening and/or the collapse of the euro itself.

The question now is whether the European mechanism will dampen down the appetites of these speculators. The first signs of the markets were encouraging, but it is certain that the speculators stand with their arms ready to hit again at the first sign of hesitation or weakness of the European Commission, the Council or the Central European Bank.

Another question is why the European mechanism was debated by the 27 ECOFIN Ministers, when in fact it concerns only the euro area countries and should have been debated and conceived by the 12 Eurogroup Ministers. Was it only in order to state the obvious, that the new mechanism will operate without prejudice to the existing facility providing medium term financial assistance for non euro area Member States?

Still another question is why the International Monetary Fund was invited to participate in the European mechanism. Was this the outcome of the intervention of non euro area Ministers or neo-conservative Ministers of both groups of countries, who still (after the global crisis) believe in the perfect functioning of the markets and on budgetary rigour instead of development incentives?

Finally, the best part of the Council's statement comes at the end, where the 27 Ministers announce their resolution to make rapid progress on financial market regulation and supervision and on initiatives about the role of rating agencies, about a stability fee or about a global transaction tax. On all these subjects, Europe cannot work by itself. It needs the cooperation of the other main players on the international scene. Will Europeans stand united to negotiate such important matters with international partners who probably have other interests to defend? Wait and see.

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