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talkpoliticsThe ESM plan was approved by the Constitutional court of Germany after lots of debates and controversy. It's supposed to start working in October, and now most hopes rest upon that plan. But what is it all exactly about? (See FAQ if you don't care to bear with me).
Although it still exists only on paper at this point, it's supposed to turn into an international financial institution, just like the IMF. The agreement for this permanent emergency fund was signed by all Eurozone members except two: Ireland and Germany. And, while Germany is now on the road to its ratification, Ireland still has one more court procedure to go through. However the Irish decision may not be so important, because Ireland doesn't participate with a big share in the fund anyway. While Germany provides 27% of it.
The stability mechanism will only become operational when 90% of the needed funds are collected, i.e. € 630 bn out of the planned € 700 bn. That's why there's still no exact deadline for the beginning of its work. The chairman of the current rescue fund Klaus Regling will probably become the chairman of the ESM as well. At the moment he's in Luxembourg, working on the details.
The princple is simple actually: granting bailout money in return for actual deeds. Not words. The fund will have a permanent € 700 bn budget, its own capital being € 80 bn. This amount will be provided in cash by all 17 Eurozone member states. The remaining € 620 bn will be in the form of guarantees and bails. The budget for crediting the member states will be about € 500 bn, because part of the funds will be blocked from being spent. The € 80 bn euros of own capital will be provided in 5 installments. Germany is the largest participant with € 23 bn.
The decision which country should be given loans from the fund will be taken at the Board of Governors of the ESM, which are the finance ministers of the Eurozone countries, or their representatives. Because Germany is the largest contributor, it'll have the biggest representation in the Council, 30%. Also the German representative will be given permission to vote only after the respective decision has been approved by the Bundestag. That's stipulated in Par.13 of the Law for Ratification of ESM.
When handing out loans, the member states will be solidarily responsible via their shares in the fund. Loans will be granted only after the country in need has accepted certain obligations, i.e. each country that's applying for an ESM loan should be able to provide a plan for restructuring its budget and reforming its financial sector and/or the economy. Those are the conditions.
So does all that make ESM a bank of some sorts? Well, at this point ESM is expected to be taking funds from the European Central Bank in order to credit countries in trouble. If it gets a bank license, the fund may be able to actually mobilise far bigger amounts in the future on its own. The purpose is to reach a point where it'll be able to get capital from the market itself, from banks or other commercial and financial entities, including physical persons if need be. Still, the authors of the plan are certain a € 500 bn fund would be fully capable of doing the job even without external financing for the time being.
As a precaution measure against depleting the fund, the Eurozone states will be obliged to serve the ESM loans with a priority. So, countries like Greece, Spain and Italy will have to pay back the ESM loans before they pay back any other. Only then the loans provided by private creditors will be paid back.
The currently existing rescue fund will be working in parallel with the permanent ESM until July 2013. Out of its initial € 440 bn at the moment about € 240 bn has remained, and that could be primarily used for healing the banking sector in Italy, which is the most urgent concern right now.
Meanwhile, there've been lots of voices of criticism as well. Wolfgang Franz, a leading German economist, agued that financing the debt crisis with more bonds would be a "deadly sin" for any Central bank, so common Euro bonds should be out of the question (something that Merkel herself has said on many occasions). That's what has prompted a group of German "economics elders" to come up with the ESM proposal in the first place, as it's a compromise scenario that all Eurozone members could work with (most importantly, Germany and France).
Other arguments against the ESM are that "The fiscal compact cannot inspire confidence because it depresses economic activity in the short run and tends to make fiscal policy pro-cyclical. It furthermore entails an implicit debt ratio target of around 30% that lacks economic justification. The transition to the fiscal compact framework will deepen the recession in the coming years. The fiscal consolidation aims are too ambitious".
In a nutshell, the condition that would require ESM intervention is when a country's debt exceeds 60% of its GDP. Some have calculated that if such a fund was created at the beginning of the crisis, it'd already have € 2.3 trillion by now, and countries like Greece, Spain and Italy would've been granted considerably larger amounts (which they'd have 20-25 years to pay back, btw).
The advocates of the plan argue taht the one thing that makes this plan so compelling is that it wouldn't burden the more stable Eurozone members as much as the issuing of Euro-bonds for example. The other, more practical advantage, is that it'll decrease the interest rates in the countries in trouble in the short-term. For Spain and Italy for example (where the interest rate is 6-7% and more), this would remove a lot of that burden from their budgets. In the meantime, it'll slightly raise the interest rates in the stable countries like Germany. But in the larger picture, the presence of this mechanism would normalise the situation on the international markets overall, because currently things are getting dangerously tilted towards a few stable markets like the German one, which is causing imbalances.
The biggest advantage of this pact, this argument goes, is that it would give enough time to the troubled countries. Time that they need to carry out the structural reforms, and additional time in which the results from these reforms could be felt and tested. Because it's a fact that years will have to pass before those reforms (if done properly) would start to bring the desired results.
There's a caveat, though. For the countries who'll be joining this financial pact, it'd mean a complete abdication from their fiscal sovereignty. The argument that the EU can't possibly be financially stable if it only has a fiscal union without a political union, is well known.
As for the security of this fund, in order to exclude any chance for manipulation of the mechanism, a triple protection has been added to it. First, every country should include in its Constitution a "brake option" against piling new debt. Second, paying back the loans would have to be associated with the introduction (or increase) of a certain tax at a national level, the money from which should directly go for the ESM. And third, if a debtor decides to trick the system and stop paying back, they'll practically be losing gold, because each participant should have to be backing their reserves with gold.
But even that is no 100% guarantee that all countries would abide by the agreements, it has to be admitted. The authors of the plan have responded to that concern with the argument that "Whoever rejects the idea of a stability mechanism and simultaneously is against the Eurobonds, may they present a better way out of the crisis please". And crazy plans abound, that's for sure. Question is, which of those would actually work, and which would be acceptable for all member states.
Although it still exists only on paper at this point, it's supposed to turn into an international financial institution, just like the IMF. The agreement for this permanent emergency fund was signed by all Eurozone members except two: Ireland and Germany. And, while Germany is now on the road to its ratification, Ireland still has one more court procedure to go through. However the Irish decision may not be so important, because Ireland doesn't participate with a big share in the fund anyway. While Germany provides 27% of it.
The stability mechanism will only become operational when 90% of the needed funds are collected, i.e. € 630 bn out of the planned € 700 bn. That's why there's still no exact deadline for the beginning of its work. The chairman of the current rescue fund Klaus Regling will probably become the chairman of the ESM as well. At the moment he's in Luxembourg, working on the details.
The princple is simple actually: granting bailout money in return for actual deeds. Not words. The fund will have a permanent € 700 bn budget, its own capital being € 80 bn. This amount will be provided in cash by all 17 Eurozone member states. The remaining € 620 bn will be in the form of guarantees and bails. The budget for crediting the member states will be about € 500 bn, because part of the funds will be blocked from being spent. The € 80 bn euros of own capital will be provided in 5 installments. Germany is the largest participant with € 23 bn.
The decision which country should be given loans from the fund will be taken at the Board of Governors of the ESM, which are the finance ministers of the Eurozone countries, or their representatives. Because Germany is the largest contributor, it'll have the biggest representation in the Council, 30%. Also the German representative will be given permission to vote only after the respective decision has been approved by the Bundestag. That's stipulated in Par.13 of the Law for Ratification of ESM.
When handing out loans, the member states will be solidarily responsible via their shares in the fund. Loans will be granted only after the country in need has accepted certain obligations, i.e. each country that's applying for an ESM loan should be able to provide a plan for restructuring its budget and reforming its financial sector and/or the economy. Those are the conditions.
So does all that make ESM a bank of some sorts? Well, at this point ESM is expected to be taking funds from the European Central Bank in order to credit countries in trouble. If it gets a bank license, the fund may be able to actually mobilise far bigger amounts in the future on its own. The purpose is to reach a point where it'll be able to get capital from the market itself, from banks or other commercial and financial entities, including physical persons if need be. Still, the authors of the plan are certain a € 500 bn fund would be fully capable of doing the job even without external financing for the time being.
As a precaution measure against depleting the fund, the Eurozone states will be obliged to serve the ESM loans with a priority. So, countries like Greece, Spain and Italy will have to pay back the ESM loans before they pay back any other. Only then the loans provided by private creditors will be paid back.
The currently existing rescue fund will be working in parallel with the permanent ESM until July 2013. Out of its initial € 440 bn at the moment about € 240 bn has remained, and that could be primarily used for healing the banking sector in Italy, which is the most urgent concern right now.
Meanwhile, there've been lots of voices of criticism as well. Wolfgang Franz, a leading German economist, agued that financing the debt crisis with more bonds would be a "deadly sin" for any Central bank, so common Euro bonds should be out of the question (something that Merkel herself has said on many occasions). That's what has prompted a group of German "economics elders" to come up with the ESM proposal in the first place, as it's a compromise scenario that all Eurozone members could work with (most importantly, Germany and France).
Other arguments against the ESM are that "The fiscal compact cannot inspire confidence because it depresses economic activity in the short run and tends to make fiscal policy pro-cyclical. It furthermore entails an implicit debt ratio target of around 30% that lacks economic justification. The transition to the fiscal compact framework will deepen the recession in the coming years. The fiscal consolidation aims are too ambitious".
In a nutshell, the condition that would require ESM intervention is when a country's debt exceeds 60% of its GDP. Some have calculated that if such a fund was created at the beginning of the crisis, it'd already have € 2.3 trillion by now, and countries like Greece, Spain and Italy would've been granted considerably larger amounts (which they'd have 20-25 years to pay back, btw).
The advocates of the plan argue taht the one thing that makes this plan so compelling is that it wouldn't burden the more stable Eurozone members as much as the issuing of Euro-bonds for example. The other, more practical advantage, is that it'll decrease the interest rates in the countries in trouble in the short-term. For Spain and Italy for example (where the interest rate is 6-7% and more), this would remove a lot of that burden from their budgets. In the meantime, it'll slightly raise the interest rates in the stable countries like Germany. But in the larger picture, the presence of this mechanism would normalise the situation on the international markets overall, because currently things are getting dangerously tilted towards a few stable markets like the German one, which is causing imbalances.
The biggest advantage of this pact, this argument goes, is that it would give enough time to the troubled countries. Time that they need to carry out the structural reforms, and additional time in which the results from these reforms could be felt and tested. Because it's a fact that years will have to pass before those reforms (if done properly) would start to bring the desired results.
There's a caveat, though. For the countries who'll be joining this financial pact, it'd mean a complete abdication from their fiscal sovereignty. The argument that the EU can't possibly be financially stable if it only has a fiscal union without a political union, is well known.
As for the security of this fund, in order to exclude any chance for manipulation of the mechanism, a triple protection has been added to it. First, every country should include in its Constitution a "brake option" against piling new debt. Second, paying back the loans would have to be associated with the introduction (or increase) of a certain tax at a national level, the money from which should directly go for the ESM. And third, if a debtor decides to trick the system and stop paying back, they'll practically be losing gold, because each participant should have to be backing their reserves with gold.
But even that is no 100% guarantee that all countries would abide by the agreements, it has to be admitted. The authors of the plan have responded to that concern with the argument that "Whoever rejects the idea of a stability mechanism and simultaneously is against the Eurobonds, may they present a better way out of the crisis please". And crazy plans abound, that's for sure. Question is, which of those would actually work, and which would be acceptable for all member states.
(no subject)
Date: 15/9/12 16:22 (UTC)(no subject)
Date: 15/9/12 16:44 (UTC)(no subject)
Date: 15/9/12 16:45 (UTC)(no subject)
Date: 15/9/12 17:03 (UTC)(no subject)
Date: 15/9/12 16:59 (UTC)Well, one proposal to rid them of these head-aches is to... actually voluntarily leave the Euro zone. Quit the Euro.
http://newsfoxworld.blogspot.com/2012/07/should-germany-exit-euro.html
Crazy ideas, you say?
(no subject)
Date: 15/9/12 18:56 (UTC)The problem is not Germany leaving. It could. But here are two buts:
1) Who says that other countries will not follow? France? Netherlands? Luxembourgh? Belgium? Denmark? Germany wouldn't leave alone.
2) Who says that the southern countries will be better then? There problems are not only debt, but competitiveness.
And last but not least is the simply fact, that of all countries it was Germany who believed (and still believes) the most in the European idea. To leave is a bit like Russia declaring the US as their new role model.
(no subject)
Date: 15/9/12 19:00 (UTC)Btw the duration of the period in which an idea has been discussed, in no way reflects on how crazy or not crazy it may be. Ideas that've been discussed for decades may be crazier than ones that've been around for months.
(no subject)
Date: 15/9/12 19:25 (UTC)(no subject)
Date: 15/9/12 19:41 (UTC)(no subject)
Date: 15/9/12 20:44 (UTC)I admit, that the period of time is no standart of craziness. I think when I wrote that it was more along the lines of: "Really, now one posted the idea on this journal before?" Personally, I think the idea is plenty of crazy. For various reasons.
(no subject)
Date: 15/9/12 20:57 (UTC)(no subject)
Date: 15/9/12 18:07 (UTC)(no subject)
Date: 15/9/12 18:35 (UTC)(no subject)
Date: 15/9/12 19:11 (UTC)(no subject)
Date: 15/9/12 19:28 (UTC)(no subject)
Date: 16/9/12 01:03 (UTC)(no subject)
Date: 15/9/12 18:55 (UTC)Now the time may've come for the latter, although I can hear the conspiracy voices that "No crisis should go to waste", etc.
(no subject)
Date: 15/9/12 20:05 (UTC)(no subject)
Date: 15/9/12 20:13 (UTC)(no subject)
Date: 15/9/12 18:39 (UTC)Which is why, primarily, the Euro was such a bad idea.
Don't get me wrong; I'm kinda in favor of an ur-currency, one that rides above national boundaries and can thus serve as an international transfer of credit. This currency, though, would have to be exchanged with domestic currencies and really only then a marker of how valuable any given domestic currency is compared to others.
And the plan outlined in the OP is only one that could work in an expanding economy. Last I checked, no country has one of those anymore (that isn't based on a dominant banking sector that manipulates the very currency it is supposed to "manage").
(no subject)
Date: 15/9/12 18:57 (UTC)(no subject)
Date: 15/9/12 19:26 (UTC)No plan that does not include a graceful way for the indebted to default—ie. non-disastrous—will not work. Sorry, DB.
(no subject)
Date: 15/9/12 19:37 (UTC)(no subject)
Date: 15/9/12 20:04 (UTC)Many of their other exports, though, like the cars, depend upon other countries being able to buy them, which means other countries must have fuel for them. That's an increasingly uncertain future.
And their banks, like banks everywhere, depend upon getting their bonds paid back to continue having the funds to fund the heavy industry.
IfWhen Greece defaults, the shock will ripple through even the most robust German employers.(no subject)
Date: 15/9/12 20:15 (UTC)(no subject)
Date: 16/9/12 13:56 (UTC)Porsche has been fiddling a lot with hybrid technology to make the gas go further.
http://en.wikipedia.org/wiki/Porsche_911_GT3#997_GT3_R_Hybrid
http://en.wikipedia.org/wiki/Porsche_918
Of course their idea of putting in a beefy gas engine then adding more electric motors on top of that might be said to be a different goal altogether, but it's still pushing the technology.
And Audi has been working on other more economically focused hybrid ideas that might be used in all VAG vehicles.
(no subject)
Date: 16/9/12 17:20 (UTC)There was also the BMW Turbosteamer engine system (http://en.wikipedia.org/wiki/Turbosteamer) that used reclaimed exhaust heat to boost horsepower to the wheels. Put that in something like a railroad engine (where the output and thus the exhaust heat is more constant), and hybrid systems really start to save fuel.
(no subject)
Date: 16/9/12 10:35 (UTC)