Following the European Council Summit in December of last year, leaders agreed to accelerate entry of the European Stabilization Mechanism (ESM), the permanent successor to the European Financial Stability Facility (EFSF) to July of this year. Given increased pressure on the remaining triple-A guarantors of the EFSF, this shift to the ESM, which will draw on capital contributions from member states as opposed to credit guarantees, can hardly come soon enough. As has been the case with most events over the course of this debt crisis, though, the good news about potential early implementation of the ESM comes with qualifications. For example, it is unclear what price parliamentarians in the German Bundestag will place on their support for the ESM, and that price might involve completion of a treaty that enshrines budgetary discipline measures for Eurozone states. While there has been progress on such a Treaty and there appears to be widespread support for enhanced discipline, significant legal questions remain over the role of EU institutions in a Treaty that has been vetoed by one of its members, the United Kingdom. If this Treaty cannot be made to work and new arrangements to ensure fiscal discipline fail to convince, opposition to early implementation of the ESM, no less boosting its firepower with increased capital, will be an issue in national parliaments well beyond the German Bundestag.
It is thus essential to consider whether the ESM in its current form can save Greece from bankruptcy and, related, whether it can be the ‘big bazooka’ that European leaders keep promising. With regard to the first question, if the ESM is only to become available in July, it may already be too late to save Greece. For Greece to remain solvent until July would require that an agreement reached by EU leaders at a summit last October, which entailed a ‘voluntary’ haircut of 50% on debt held by private investors, does not break down, which is far from certain. Absent agreement with private investors, Greece will likely undergo a disorderly default as early as March, yet agreement along the lines of EU/IMF proposals would result in bankruptcy for some private lenders, namely Greek banks.
Turning to the related question of whether the ESM can serve as the oft-promised ‘big bazooka’, the answer rests on two main issues. The first is whether private bondholders are ultimately forced into accepting the 80-90% losses on Greek debt that are now on the table and the second is whether and when agreement can be reached on a Treaty that commits Eurozone states to uphold budgetary discipline. EU leaders have already stretched the concept of ‘voluntary’ participation regarding private sector haircuts on Greek debt to the point where it can hardly be taken to mean what it says. As noted by many onlookers when private sector involvement was originally being debated, to the extent that the private sector was forced to participate in ‘voluntary’ haircuts, the financial markets would be less, not more convinced of the creditworthiness of Eurozone sovereigns. Hence, the conundrum is that further losses on the part of private creditors are likely necessary to avoid bankruptcy for Greece, yet this will increase pressure on EU leaders to demonstrate that such involvement is a special case and would not be repeated in other struggling states, for instance Italy.
The second point regards the Treaty currently under negotiation. Without engaging in much pure speculation, it seems that negotiations will hinge on the question of automaticity of sanctions in response to violating fiscal rules, the role of national parliaments in implementing EU-level fiscal measures, the related question of whether Eurozone states will embed commitments to fiscal discipline in their national constitutions and what room for maneuver will be incorporated in the event of significant economic difficulties. Absent tough measures on fiscal discipline that can at least be sold to domestic publics as binding, it will be very difficult for national governments to commit more of their taxpayers’ money to boosting the ESM. Of course all of this is besides the challenge of having to negotiate the agreement outside the formal structures of the union, because of Britain’s refusal to participate.
As has been the case throughout this crisis, it is unclear where things will head next, not to mention the speed with which new challenges will emerge. Here lies a crucial tension at the heart of the Eurozone debt crisis – financial markets move quickly and demand equally swift responses, yet the EU is composed of 27 sovereign states that must all agree for action to be taken. It is thus little wonder that early implementation of the ESM may still come too late.