The green light given to the ESM has allowed another piece of the crisis management mechanism to fall into place, further reducing risks .Obviously, potential factors for a resurgence of the crisis in the short term (Spain and Greece) still need to be managed. What’s more, the time required to complete fiscal consolidation and to redefine the euro area’s institutional structure will necessarily be lengthy.,……..
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Following the ECB’s announcement, confidence in the effectiveness of the European Stability Mechanism was further boosted by the ruling of the German Constitutional Court, which gave the go-ahead to the ESM. The conditions imposed by the Karlsruhe court (that Germany’s share of the capital authorised for the ESM not exceed its current level, i.e. 190 billion euros, and that no clause may be interpreted in such a way as to result in greater obligations without the assent of the German representative) do not seem to be particularly restrictive, as it had been clear for some time that an increase in authorised capital would have been highly unlikely. Also, the ECB’s decision to act in support of EFSF/ESM programmes within the framework of a separation of roles (with the ECB supporting quotations on the secondary market and EFSF/ESM funds aiding the refinancing of debt through interventions on the primary market) significantly reduces the importance of the issue represented by the adequacy of European funds. The President of the German Republic has already promulgated the ratification of the decision, which means the European Stability Mechanism will be able to hold its inaugural board meeting on 8 October (it has been confirmed that the two instalments due this year amounting a total 32 billion will be paid in October). What is certain, is that the rules governing the functioning of the fund remain subject to political risk, also in light of the conditions imposed by Germany’s constitution: the need to consult national parliaments when required by national legislation, with Germany’s at the fore, and the risk of blocking minorities taking shape within the ESM. On this front, the outcome of the elections in Holland cooled concerns, as the anti-Euro parties lost significant ground, and the new government coalition should guarantee at least more orthodox communication.
However, the recent developments do not represent a final solution to the crisis, as potential factors for a resurgence of the crisis in the short term still exist, and the road to cover in the medium term is long. As regards the short term, Spain and Greece continue to pose the risk of a rekindling of the crisis. In Spain, there are expectations ahead of the publication of the report drafted by PwC, Deloitte, Ernst & Young, and KPMG, on the recapitalization needs of individual financial institutions, in order to exactly quantify the size (and conditions) of the bailout package for banks. Also, there is still a good chance that the country, probably in October, could be forced to formally file a request for aid in order to refinance its public debt. Only in the event of foreign capitals returning to the Spanish market will the country be able to avoid this move. In Greece, as we write, talks are still under way with the Troika, that has raised doubts on the government’s ability to raise at least 2.2 of the 11.5 billion euros in additional measures required for 2013-2014. Samaras has carried on negotiations with official lenders, although the lack of unconditional support from the parties guaranteeing his parliamentary majority makes his mission extremely complex. The Eurogroup’s position is not as soft as it may seem: the margin of flexibility allowed to Greece apparently extends only to the concession of more time, but not to more money. A decision is not expected to be made before October.
The time required to redefine the euro area’s institutional structure, another work in progress in this long consolidation process, will necessarily be lengthy. EU President Van Rompuy laid out for the governments of the 27 member states, and for the EU Parliament, an ambitious long-term plan, ahead of the drafting of the “Four Presidents’ Report” (Barroso, Draghi, and Juncker, in addition to Van Rompuy) on which consultations will begin next week. The most likely topic to be taken on first, ands swiftly, is that of a European Banking Union: this week the European Commission presented its proposal for a single supervisory mechanism (SSM), a necessary step to allow the ESM to directly recapitalise troubled banks. The Commission intends to assign ultimate supervisory powers over the entire banking system to the ECB; however, between January 2013 and 30 June 2013, the ECB will decide which credit institutions to supervise; from 1st July, supervision will be extended to all banks of systemic importance, and full supervision of the banking system will begin as of 1st January 2014. The Commission hopes that the European Parliament and Council manage to converge on a final version of the regulation by the end of 2012: this might be an ambitious timeline, given the long processes required by other recent reforms, and the resistances of some member states, including Germany, to forsaking national banking supervision powers. The measures will be approved at the European Union level, but will apply only to euro area member states; the other states may apply to be included on a voluntary basis. As regards the other issues, beyond the banking union, there is still a long way to go. However, the fact that Germany and France have established a working group with the aim of drawing up a proposal by the end of the year to change the Treaties, signals that the politicians of core countries are also gradually coming round to the idea that the crisis will only be overcome through greater fiscal (and political) integration. If nothing else, the present crisis has had the role of proving that there is no alternative to this path.
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