Cause and Effect in European Politics and Law

The Eurozone Creates its Own Rescue Fund

Ralitsa Kovacheva, May 8, 2010

On the day of Europe - 9 May, the EU Finance Ministers will convene for an extraordinary meeting to discuss the Commission proposal for a European Stabilisation Mechanism. The decision for the urgent ECOFIN has been taken at the meeting of the eurozone countries late on Friday, 7 May.

Although no details from the proposal have been officially reported yet, it is expected a special eurozone Fund to be created with a budget of around 70 billion euros. The aim is to protect the countries of the Economic and Monetary Union from speculative attacks by financial markets, as it becomes clear from the statements of some euro leaders. It was market pressures that forced Greece to request emergency assistance from the EU and the IMF because of the rapidly rising interest rates of its loans. The same danger is threatening Portugal and Spain, after their credit ratings have been lowered.

At a briefing after the meeting, Commission President Jose Manuel Barroso refused to provide details about the proposal for a European Stabilisation Mechanism before it was discussed and, most likely, adopted by the EU finance ministers on Sunday.

"We will defend the euro at any price, we have several tools available and will use them", Barroso said. Asked how the proposed stabilisation mechanism will be financed, he said only that it would be within the existing financial resources, as defined in the Union budget. With the opening of markets on Monday Europe will be ready to defend the euro, this is the message we want to send, French President Nicolas Sarkozy said in a statement.

Late last night the eurozone leaders have approved the agreement with Greece on the package worth 110 billion euros over three years, of which 80 billion will come from Europe and the rest - from the IMF. A statement by the eurozone leaders defined the programme, adopted by the Greek Parliament, as "ambitious and realistic."

The decisions we are taking reflect the principles of responsibility and solidarity, enshrined in the Lisbon Treaty, which are at the core of the monetary union,” the statement underlines.

The eurozone countries are unanimous that the consolidation of public finances is a priority for all and they will take the necessary measures to comply with the fiscal targets for 2010 and subsequent years in accordance with the Excessive Deficit Procedure. By the end of June the Council of finance ministers will review the situation based on an assessment of the Commission. It, in turn, should increase pressure on member states to respect the criteria of the Stability and Growth Pact.

On 12 May the Commission will present its comprehensive vision for reform in three main areas:

- Widening and strengthening the coordination and surveillance of economic policies of euro area countries, while paying particular attention to debt and competitiveness;

- Strengthen the monitoring procedures in the euro area countries, including through more rigorous implementation of the Stability and Growth Pact and more effective sanctions;

- Establishing a crisis management mechanism while preserving the principle of independent budget responsibility of the Member States. (One of the measures proposed by the European Commission provides for it to be entitled to examine national budgets of eurozone countries before they are submitted to national parliaments for approval.)

According to the leaders of the eurozone, the market situation requires urgent action to be taken with respect to regulation and supervision. "Increasing transparency and supervision in derivatives markets and dealing with the role of rating agencies are among the key priorities for the EU. We also agreed on intensifying the work on crisis management and resolution in the financial sector and on a fair and substantial contribution of the financial sector to the costs of crises. The work on assessing whether more steps are necessary in view of recent speculation against sovereign debtors should be sped up."

These issues will be discussed at the June European Council in the context of the Commission proposal. The European Union should come up with a common position for the G20 summit in June, where progress is expected on the topic. After the last meeting of the G20 finance ministers it became clear that there are considerable differences between the countries on key issues. The IMF is expected to issue a final proposal for the introduction of global bank levies, so banks to be forced to finance their own future difficulties and also to prevent new crises of the current scale.