29 March 2012

FT: Euro fireproofs itself on the cheap

As always with the eurozone's congenital need for laborious compromise, a long quest for a more secure financial firewall has resulted in improved protection against a sovereign debt conflagration but continued gambling with the bloc's own economies and the rest of the world's goodwill.

Flexing the eurozone’s fiscal muscle is the right way to calm self-fulfilling panics in sovereign debt markets while respecting the bloc’s legal and political requirements. Flexing it more would be even better. The bigger the funds, the lower the chance of having to use them and so the smaller the risk of renewing the political battles that strain Europe’s solidarity.

Those who have always resisted going beyond the minimum have now trapped themselves behind lines in the sand: in Germany’s case, its €211 billion maximum guarantee for EFSF loans. Ms Merkel has gone the whole way up to this self-imposed limit; but it is insufficient to pack the €1 trillion or so punch that Brussels wants by adding the whole EFSF to the ESM.

All could still go well – €500 billion is enough for the most likely calls on the EFSF/ESM: top-ups of existing rescues or funds to recapitalise banks. By venturing into medium-term bank funding, the European Central Bank has bought time. But this raises the risk of complacency, in creditor as well as debtor states.

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