Europe, Merkel, the ESM and a possible asymmetric shock

Much of the French and German press was preoccupied with analysing what Angela Merkel meant when she made her proposals on the eurozone. The consensus is similar to ours – there is not much change from what we knew already. What we do sense, however, is that some of the commentators underestimate the difficulty to getting any of this agreed at EU level. Do we really think that the new Italian government will accept a rule change to allow the ESM/EMF to force a national debt restructuring?

Werner Mussler has done a good job of dissecting the entire proposal in his analysis for FAZ. For starters, he noted that Merkel did not mention deposit insurance, a eurozone budget or a eurozone finance minister. Instead she is proposing three new sources of funding. On the first one – the five-year credit line – he notes is an important distinction. At present, a programme can only be triggered if the eurozone as a whole is in trouble. Merkel’s short-term programme would not be subject to the same constraint. The idea is to allow the ESM to help countries that suffered either an asymmetric shock or some form of domestic economic or financial crisis.

The second pot of money are the fund for innovation, which Mussler sees administered by the ESM – not by the European Commission. Merkel mentioned a total volume in the low double-digit billions, but as so often when German politicians and newspapers report on numbers they don’t always tell us whether these are total stocks or annual disbursements. The third pot is a separate fund to incentivise countries to conduct structural reforms.

The ESM will not only change its name and administer another credit line but, as Mussler asserts, Merkel wants the new EMF to act as the quasi-intergovernmental finance ministry of the eurozone, with much stronger economic expertise than at present, and with co-responsibility for supervision of fiscal policies in all member states, not just crisis countries. It is not hard to see how this proposal could end up generating an inter-institutional war between Brussels and Luxembourg.

Source: Wolfgang Munchau