The ESM extension-fudge in full
Remember the leveraging scam? That was in October when a badly advised European Council thought they had found the magic bullet to increase the firewall? We fear this may be happening again as finance ministers are negotiating another smoke and mirrors kind of trick to persuade the rest of the world that the firewall goes up when in fact it is not.
Der Spiegel and the FT report that the German government is ready to accept the principle of an increase. At the finance minister’s informal meeting in Copenhagen, Schäuble will agree with his colleagues to combine parts of the EFSF with the €500bn of the ESM. For the moment it is unclear how much money in the EFSF can be added to the ESM. With its move Germany seeks to avoid total isolation in Copenhagen after Finland, Germany’s only previous ally in this matter, said this weekend that it was prepared to accept an increase.
There are three options, of which only one would constitute a permanent increase. The first and least ambitious, likely to be preferred by Germany, would be to tag the existing programmes of the EFSF onto the ESM. That would not change the €500bn ESM’s capacity at all, but would not subtract from it either. The second, around which the FT says a majority view is building, is a allow EFSF and ESM fully to coexist for one year, until the EFSF expires. The third would be to make the EFSF part permanent. The first option would temporarily increase the total umbrella to €750bn, the second to a €1 trillion, but in both cases the eventual size of the ESM will revert to €500bn. Only in the third variant would the umbrella be permanently increased to €1 trillion.
Merkel may need a two-thirds majority in the parliament for the ESM
Angela Merkel’s policy to concede only a little bit at any one time and to make pledges of which she knows that she has to break them in the future may be backfiring on this issue. Der Spiegel has a report out this morning, according to which the extension of the ESM may require a two thirds majority in the parliament – in other words – an approval of the SPD. The legal opinion was provided in an expertise by the Centrum für Europäische Politik, which argued that the decision would have budgetary implications that last beyond the term of a single parliament. The legal interpretation contrasts with that of the finance ministry, which insisted that a simple majority would be sufficient.
A two thirds majority would be politically difficult, as the SPD would have a higher leverage to extract a political price for its support of an expanded ESM, as well as for the fiscal pact, which also requires a two-thirds majority.
Will Austria block or delay the ESM and the fiscal pact?
In Austria, the Green party threatens to vote against the ESM and the fiscal pact, which could hold up the entire process, which means that the ESM might not be ratified by July, Der Standard reports. Finance spokesman Werner Kogler from the Greens says that there will be no approval as long as there is no progress in the financial transaction tax debate. The Greens’ votes are crucial to ensure a two-third majority in the National Rat required to ratify the EU treaty.
Wolfgang Münchau on the consequence of this fudge
In his FT column, Wolfgang Münchau writes that this fudge is likely to bring back the crisis. Market pressure has already gone up because of Spain, but once the wider world is about to discover the fudge that is currently negotiated, confidence in the crisis resolution policies is going to break down again, and we will be back to where we started. Germany has committed itself to a guaranteed maximum risk of €211bn – a threshold that is not consistent with an enlarged ESM. Any solution that circumvents the ceiling must logically imply that the fund is not raised. Münchau concludes that it is politically very hard to raise the ceiling within the framework of a multilateral arrangement. To shift funds of that size would require a joint-and-several structure, where the insurance function is intrinsic in the system, and not a cross-national transfer.
Monti concerned about Spain
Reuters reports that Mario Monti expressed concern about Spain's public finances, warning that it would not take much to reignite the euro zone debt crisis. He said Spain had made progress on labour market reforms but did not pay the same attention to public finances.” He said this caused concerned as Italian yields were already rising. He said a fresh eruption of the euro zone crisis could cancel out the progress made in Italy and "take us back months." The FT reports that Olli Rehn, who spoke at the same conference as Monti, said: “Because there was a perception that Spain was relaxing its fiscal targets for this year, there has been already been a market reaction of several dozen basis points on yields of Spanish bonds.”
The Spanish fiscal adjustment target is more ambitious than what happened in Greece
This is an interesting article in El Pais this morning. The 5.5% fiscal adjustment Spain is required to undertake in the next two years, would amount to a bigger fiscal adjustment than of Greece in the last two years, which was less than 5%, citing the latest monitoring reports of the European Commission. The article says the only advantage Spain still enjoys that it remains in full control over how to achieve the adjustment, as it is not in an EFSF programme. The article says the scale adjustment was historically unprecedented.
Rajoy fails to win Analusia
Mariano Rajoy’s PP became the largest party, but failed to gain an overall majority in the regional elections of Anadulsia, where the Socialists will continue to govern, with the help of a strengthen IU – a party of the left. El Pais has all the details, and the political assessment. This is a huge setback for Rajoy, especially after his strong victory last year. The article said the results would strengthen the position of Alfredo Rubalcaba, who has been elected Socialist leader six weeks ago. Andalusia has been a long-time Socialist stronghold.
Christian Democrats win state elections in Saarland
In the anticipated state elections in Saarland, the incumbent CDU won with 35.2% ahead of the Social Democrats (SPD) with 30.6%, Frankfurter Allgemeine Zeitung reports. The CDU is expected to form a grand coalition with the SPD, after the SPD previously ruled out to form a coalition with the Left, which got 16.1% (This is Oskar Lafontaine’s home state). In January, the outgoing coalition of CDU, FDP and Greens collapsed, triggered early elections. The FDP only got 1.2% and is thus no longer represented in the state parliament – an ominous sign for the party’s future in the Bundestag. The Greens just made it into the parliament with 5.0%. The Pirate party got 7.4%, thus confirming that it may be a political force to be reckoned with for the federal elections in September 2013. There will be two more state elections in 2012: in North-Rhine Westphalia and in Berlin.
German government thinks Bundesbank’s worries about Target 2 balances are hogwash
The German government does not share the worries of the Bundesbank that Target 2 balances constitute serious risks for Germany, Der Spiegel reports. In response to a question by the eurosceptic CSU MP Peter Gauweiler, the finance ministry explained even in case of the exit of a eurozone member, the obligations of that member would persist. Also there was collateral to guarantee the balances. The Bundesbank had hinted repeatedly that it saw risks in the ever rising Target 2 balances.
Mirow warns the eurozone of including EBRD presidency in the horsetrading for eurozone top jobs
Talking to Financial Times Deutschland, EBRD president Thomas Mirow warned the eurozone of including the EBRD presidency in the current round of horse trading around a number of eurozone top jobs. The EBRD is an international organization in which the Europeans have the majority of capital and votes, the former SPD deputy finance minister conceded. „But it is crucial for the bank that Non-Europeans and Europeans not part of the EU have their share and their say“, Mirow argued. „For many Non-EU states it would be an insult to be confronted with a solution that would be the result of a European horsetrading“, he said. Currently Angela Merkel pushes for Wolfgang Schäuble to succeed to Jean-Claude Juncker at the helm of the eurogroup. In exchange she is said to be willing to let the French get the EBRD presidency. Part of the deal are also the chairmanship of the ESM for which so far the current EFSF president Klaus Regling is the front runner and the succession to José Manuel Páramo-González in the ECB’s executive board for which Luxemburg’s central bank governor Yves Mersch is seen as the favourite. Mirow vowed to fight for a second mandate underlining that he had the support of many governments.
Sarkozy consolidates his lead for the first round
According to an Ifop poll for Le Journal du Dimanche, Nicolas Sarkozy has consolidated his lead in the first round of presidential elections on April 22. The figures show that he would obtain 28.5% against Francois Hollande with 27%. The extreme right wing candidate Marine Le Pen would get 16%, and extreme left candidate Jean-Luc Melenchon would get 12%. Centrist Francois Bayrou would be at 12%. Poll analysts caution, however, that Hollande is still leading in the second round of May 6.