By Dr. Abdul Ruff
Western finances have been in shambles. For too long, euro-zone politicians have been discussing an alternative for increasing the means available to the rescue fund without national governments being required to provide further money. The trick is to provide the European Stability Mechanism (ESM) with a banking license that would allow it, in practice, to borrow as much money as it needs from the European Central Bank. The ESM would simply buy up bonds from crisis countries and then provide these to the ECB as collateral for loans, just as normal banks do.
While governments and central banks want to preserve the euro, it looks certain that Greece and some more countires in EU may soon face bankruptcy. Most countries of Europe support the idea of a common European fiscal policy, and shared debt would be part of that. But a solution needs to be found that would ensure discipline in the individual states..
The Greek tragedy itself is merely a prelude to the real battle to save the euro. Experts see a risk that ailing countries will simply continue to borrow, unhindered, as soon as the bill is shared by the entire euro zone.
Euro bonds are meant to obscure the differences in creditworthiness among the individual euro-zone member states. Regardless whether the borrower is Italy, France or Germany, all euro-zone states would issue common bonds, Europe is eager to reduce the borrowing costs for crisis-plagued euro-zone countries.
As a result of debates, a permanent euro bailout fund is likely to be launched this year. The ESM will provide a common fund for the euro-zone countries for dealing with the debt crisis. The intention is also that the ESM would be capable of financing possible aid programs for troubled countries like Spain and Italy, though the ESM doesn’t have enough money in its coffers for that on a permanent basis.
The ESM wants to achieve an impossible lending capacity of €500 billion until mid-2014, and even that sum would be too little for fighting euro fires in the larger euro-zone countries.
The last resort in the crisis is obviously the European Central Bank. The ECB is currently debating a proposal based on the idea that the ECB could intervene and purchase bonds was enough in recent days to drive yields on Spanish government securities back under the critical level of 7 percent. The central bank would set a cap on the upper limit for interest rates on the government bonds of heavily indebted euro-zone countries. Right now, for example, it could be set at 6 percent. If yields on bonds threatened to exceed this limit, the ECB would intervene and purchase securities on the market. Given its unlimited resources, it would essentially have inexhaustible funds for these purchases.
The central bank is reliant on the trust of financial market participants. But if it began indirectly helping countries to print money, it could damage that trust in the longer term. With yield caps, the ECB would become a tool of the euro-zone member states — a development that would be extremely controversial for an institution that is supposed to be independent.
But the problem is the question of political control as the ECB isn’t answerable to any parliament, and setting fiscal policy is among the most important tasks parliaments are responsible for. So, who will monitor and control which bonds the ECB purchases and at which level a yield cap is to be imposed? Some economists argue that as a political institution the ESM, for example, should decide which countries receive bond aid and the conditions which they must fulfill in order to obtain it even as the ECB tackles the market.