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For anyone demanding a big bazooka, Friday was a disappointment. The finance ministers of the eurozone settled on one of the lesser proposals for an increase in the firewall. The agreement raises three immediate questions. How big is the firewall really? Will it all be enough? And should the Group of 20 leading economies top up their commitments to the International Monetary Fund?
Ignore the headlines. This is not an increase in the eurozone’s rescue fund to €700 billion. The reality is that the eurozone’s new fund, the European Stability Mechanism, will have €500 billion available for future crisis programmes. The €700 billion is a meaningful metric only for parliaments of Member States because it outlines their risk exposure. It is not a forward-looking measure.
Jens Weidmann, president of the Bundesbank, was right when he said you cannot solve the eurozone crisis through a rescue fund. But an enlarged ESM would have given the rest of the world reassurance that the eurozone is serious in its efforts to solve the problem. That is now not the case.
One reason for this exercise was to persuade the G20 to authorise a proportional increase in IMF support for the eurozone. Should the 20 nations agree, as eurozone leaders were quick to demand on Friday? I think not. The US and other Member States have asked the eurozone to double the capacity of the ESM and raise its funds from €500 billion to €1 trillion. This would have paved the way for an IMF contribution of €500 billion. The combined size of the umbrella would have been €1.5 trillion, or roughly $2 trillion. That will now not happen.
Last week the leaders of China, India, Russia, Brazil and South Africa expressed their frustration about the eurozone’s policy response. This agreement is not going to put their minds at rest. The double-counting also leaves a bad taste. It reminds me of last year’s disgraceful attempt to raise the lending ceiling through leveraging – something that surely deserves the title of the daftest idea in the politics of crisis resolution. Friday’s agreement was not daft, simply too small. It should and will be understood as just that.
The truth is that eurozone capitals in general, and Berlin in particular, are politically not ready to commit more funds. Any observer of German politics would have known that. Chancellor Angela Merkel simply does not have a majority for a “big bazooka”. She may even need a two-thirds majority in the Bundestag to get this agreement passed.
The G20 should tell the eurozone that Friday’s deal is unacceptable. The idea of ESM enlargement was to provide a minimally sufficient degree of insurance to preserve the integrity of the eurozone in the most adverse situation. A €500 billion ESM cannot do that. It is unreasonable to expect the rest of the world to make up the rest, especially given the negative impact of the eurozone’s austerity programmes on the rest of the world. The G20 should instruct the eurozone to return to the negotiating table.
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