Here is an idea, ventured in the Spiegel Online, to combine three funds to backstop the euro crisis. Instead of letting the ESM (European Stability Mechanism, or the permanent bailout mechanism) take over from the EFSF (European Financial Stability Facility, or the temporary bailout mechanism) by July, combine them.
The ESM will become operative in July this year, a year earlier than originally planned, according to a recent decision of the 17 eurozone countries. It was supposed to take over from the ESFS, but perhaps not. It will have 80B euro in paid-in capital (five yearly installments of 16B euros from member countries and the rest in credit guarantees).
The IMF was also supposed to add $250B to the ESM, giving it a total size of $750B. Mario Monti, the new Italian Prime Minister, has brought his considerable moral power to bear on this and urges that the fund to be increased to $1T. He's not the only one.
Needless to say, the Germans aren't so keen. Their cash call for the ESM amounts to 22B euro with a further 168B euro in necessary guarantees, so one can feel some of their hesitation.
The ESM is supposed to be more robust than the recently downgraded EFSF and decisions on how to allocate disbursements in an emergency are no longer taken by unanimity (but a qualified majority of 85%), increasing efficiency of decision making.
The idea to merge the funds was first ventilated by Christine Lagarde, the head of the IMF. The EFSF still has about 250B euro in lending capacity left. Another 500B euro could come from the IMF, but since euro zone countries have already pledged some 150B euro to the IMF for a credit facility (in the hope other countries would join), there is 350B euro to be found.
And we know Merkel is in China at the moment, with the aim of interesting the Chinese in coughing up some of this. Since reforms in countries like Italy, Spain, Portugal, and Ireland, are indeed being implemented, and since the eurozone, not to mention the ECB, now seems more willing to do whatever it takes, the chances for a more positive response from the Chinese have improved considerably.
Curiously enough, the United States doesn't seem to be in a hurry to increase IMF funding, despite the fact that it clearly has an interest in European financial stability and Treasury Secretary Tim Geithner having pleaded for bigger bazookas for quite some time.
What does three trillion euro buy?
So by the summer, we could have a 1.5T eurozone backstop fund to scare bond vigilantes away, and this on top of the recent three-year loan facility from the ECB, which had an uptake of half a trillion euro, with possibly a trillion more to come at the end of this month.
This should clearly calm the markets and reduce financing costs. To a considerable extent, this is already happening. The remaining big risk is that the recession is so bad that deficits are increasing. Greece and Portugal are still in a deep slump, Spain's budgetary targets are quite illusory as well and could show negative growth to the tune of 1.8%. Italy might experience negative economic growth of 2.2%, according to the IMF.
The kind of fire power now being amassed by the authorities does away with some of the self-fulfilling negative feedback loops, which sees investors and depositors running for the exits, increasing interest rates and putting banks under pressure in the periphery and thereby scaring even more investors and depositors away.
But whether it helps much to return economic growth or address the 30% currency misalignment within the eurozone, that's entirely another matter. Despite the deep recessions they are experiencing, Greece and Portugal still have very large trade deficits, testifying to their competitiveness problems.
So, if these plans are realized it gives the euro more time, but sooner or later we have to have growth. Actually, the sooner we manage to do that, the better.
We've long argued that the emphasis on policy was wrong, too much austerity and not enough structural reform. That opinion now seems growing, with Monti showing the way. A bigger bazooka is helpful, but doesn't do away with the fundamental problems.
