Europe's firewall against the financial crisis is ready. The finance ministers of the 17 eurozone states have launched the European Stability Mechanism (ESM) in Luxembourg - but with little fanfare.
There were no champagne or big speeches, no glitz and glamor for the launch of one of the world's largest financial instruments: the European Stability Mechanism (ESM) will have a lending capacity of about 500 billion euros ($648 billion). "There is no reason to celebrate," said eurozone chief and Luxembourg prime minister, Jean-Claude Juncker. "We're only doing our job here - and that's good news for Europe."
He said that the eurozone was proving its determination to resist the crisis. Juncker is also the chairman of the board of governors of the ESM, which consists of all the finance ministers of the 17 eurozone member states who came together on Monday. The board must agree unanimously on all essential decisions - a condition demanded by Germany's constitutional court in September.
A modest office
The first session of the ESM was brief. The finance ministers decided on a number of formalities and named Germany's Klaus Regling as the managing director of the fund. Regling said that with its robust financial structure and a number of instruments at hand, the ESM was able to fulfil its mission. "It will help the member states - of course only under strict conditions."
There's a certain modesty about the fund. The second floor of the Luxembourg office building doesn't even have a sign at the door indicating that it houses the new financial institution. All there is is a letter box. The former staff of the temporary European Financial Stability Facility (EFSF) are now to build the ESM. In 18 months everything is to be in place; by then some 100 financial experts will be working for the ESM.
Real cash power
Differing from its predecessor EFSF, the ESM will have 80 billion euros of capital contributions in cash coming from the 17 eurozone member states. In addition to that, there will be 620 billion in "callable" capital. This is to make the fund more credible on the financial market than the EFSF. The new fund is to be able to take credit on the financial markets at good rates and pass it on to heavily indebted member states to give them time for reform efforts. Germany is the fund's largest contributor with some 27 percent. German Finance Minister Wolfgang Schäuble said that setting up the ESM meant realizing something that long had been planned. "This shows we are reliable. And eventually, the financial markets will also get this," Schäuble said in Luxembourg.
Spain the first in line?
Luxembourg Finance Minister Luc Frieden warned that the countries which are currently in financial difficulties must not reduce their reform efforts despite the new measures coming into effect. "There's need for a lot of reforms, but in case something should go wrong, we now have a fire-extinguisher to jump in. That, I think, is an important step to increase stability in the eurozone," The ESM would not though be enough should there be a "tsunami" of aid requests, for instance if both Spain and Italy should need help at the same time, Frieden added.
The first clients of the ESM could be Spanish banks, Cyprus or possibly Slovenia. The details for a bailout of Spanish banks remained unclear, however, after the first session of the fund. The problem is that there still is no joint European banking supervision which eurozone members have said should be a condition before ailing banks could be recapitalized by the ESM. It's also unclear whether the ESM is to also help other troubled banks from Ireland, Greece and other states. Whether the ESM is to use a full banking licence to be able to borrow money from the European Central Bank is "to be decided in the coming weeks," Juncker said in Luxembourg.
"We are still here"
Many experts, like the head of German economic research institute IFO, Hans-Werner Sinn, see the ESM as a gigantic "bad bank," designed to pool debt from the different member states. European Parliamentarian Udo Bullmann called for democratic control of the ESM. So far, the oversight of the fund will lie not with the EU parliament but with independent external accountants.
"The situation is much calmer than it was two years ago," Luxembourg's Luc Frieden said. "We have been talking about Europe collapsing for two years. Europe and Europe's banks are still here, though."
Two years ago, when Klaus Regling was put in charge of the EFSF, he thought the bail-out fund would never be actually used. Its mere existence would be enough to calm markets. Today, two years on, it is clear that he was wrong. The EFSF has distributed some 190 billion euros in loans. Even Regling cannot predict how much its replacement, the ESM, will have to dole out to EU member states.
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