Wall Street Journal
March 22, 2011
The European Stability Mechanism was agreed as the euro zone’s permanent State-rescue lifeboat at the finance minister level this week.
She’s an impressive vessel. Supplanting the temporary European Financial Stability Facility when that expires in 2013, the ESM will be able to throw a €500 billion lifeline to future struggling national treasuries. It will also require the 17 euro-using countries to put up €80 billion in cash, whereas mere loan guarantees were sufficient for the EFSF.
Implicitly large enough to rescue even economies as big as Spain’s, should the need ever arise, the ESM is the powerful statement of intent its creators wanted. It should be sufficient to head off the sort of existential and systemic worries the euro faced in 2010, as one peripheral state after another saw its bond markets buckle.
However, the ESM doesn’t answer some of the individual member states’ problems.
For one thing, it will be unable to buy strugglers’ bonds on the secondary markets, leaving a sullen European Central Bank as buyer of last resort. ECB chief Jean-Claude Trichet had lobbied hard to let the ESM buy. In vain, as it turned out.
Moreover, financial support from the ESM will depend on a sustainable borrowing plan from the country with its hand out.
Markets are therefore likely to remain nervous about the prospects for Greece, Ireland and Portugal. In each case, the effort required to make public debt sustainable in the short or medium term is both massive and politically loaded.
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