Euro zone finance ministers agreed on Friday on a temporary increase in their financial rescue capacity to prevent a new flare-up of Europe’s sovereign debt crisis, but markets may judge it too small to be convincing. Austrian Finance Minister Maria Fekter said the 17-nation currency area would combine two rescue funds for a year to make more money available in case of emergency. Reuters today
The big debate today: 500 bn. euro? 800? 1000? 2000? How much money do we need to save the banks… sorry, the euro, in case of trouble? Sad Europe. Sad. A Europe that when employment support is needed talks about making firing easier. A Europe that when demand-boosting policies are needed talks about sacrifices and austerity. A Europe that when confidence is needed talks about how to save investors from default. A bunch of inconsolable widowers lead the Continent with their embedded pessimism.
Tamara de Lempika, La Vedova, 1924.
But pessimism apart, here is the true reason why the debate on the size of rescue funds to be provided might turn out to be totally irrelevant. Simply read the rules of the game establishing the European Stability Mechanism:
If indispensable to safeguard the financial stability of the euro area as a whole and of its Member States, the ESM may provide stability support to an ESM Member subject to strict conditionality, appropriate to the financial assistance instrument chosen. Such conditionality may range from a macro-economic adjustment programme to continuous respect of pre-established eligibility condition.
If a decision pursuant to paragraph 2 is adopted, the Board of Governors shall entrust the European Commission – in liaison with the ECB and, wherever possible, together with the IMF – with the task of negotiating, with the ESM Member concerned, a memorandum of understanding (an “MoU”) detailing the conditionality attached to the financial assistance facility. The content of the MoU shall reflect the severity of the weaknesses to be addressed and the financial assistance instrument chosen.
So, let me explain if it is still not clear. You, country A, are in trouble. You will get assistance from us only if you do what we tell you. Great. There is only one problem: country A is in trouble because so far it has been doing what told, i.e. austerity, with the help of the same guys that will be in charge of deciding the financial assistance package.
If it must do more austerity to get the funds, better not get the funds and do growth policies by boosting spending and demand!
The only chance would be to have an IMF-led process, since recently the IMF seems to have been discovering the virtues of keynesian expansive policies in a recession to improve stability prospects. But, even there, I would not rely too much on the IMF impact in a matter where the European Commission will want to be the lone (sad) ruler.
So, 1000 bn or 2000 bn assistance is irrelevant. What matters is if these bn are to be spent for joy and opportunities or for sorrow and sacrifices. If for the latter, yield spreads will never go down, no matter how much money you will pour-in, since as we know country conditions will worsen, as they have all over the past (austerity-driven) year.
And we will sing, remembering the famous song: Bye bye happiness, hello loneliness, I think I am going to die.
Thank you Ale.