EU Reaches Agreement on Permanent Bailout Fund

Spiegel
January 24, 2012

Euro-zone finance ministers meeting in Brussels on Monday night finalized the treaty governing the permanent euro bailout fund, the ESM. The deal paves the way for the ESM to take effect in July, a year earlier than planned. German Finance Minister Schäuble also said that final agreement had been reached on tighter euro-zone budgetary rules.

The 17 euro-zone countries have reached agreement on the contract for the permanent euro bailout fund, the European Stability Mechanism (ESM), clearing the way for the aid fund to be launched one year earlier than planned. Luxembourg Prime Minister Jean-Claude Juncker, chairman of the group of euro-zone finance ministers, announced the agreement following a Monday night meeting in Brussels. The ESM is now set to replace the temporary European Financial Stability Facility (EFSF) on July 1, a year earlier than originally planned.

"I believe this is an important achievement," said German Finance Minister Wolfgang Schäuble after the meeting. "It demonstrates that the euro group and the European Union as a whole is capable of taking the necessary steps."

Schäuble also said that agreement had been reached on the euro-zone fiscal pact, which would submit members of the common currency zone to stricter budgetary rules. "We aren't yet over the mountain," Schäuble said in reference to the ongoing euro-zone debt crisis. But he said there is "cause for optimism."

The ESM will be funded with €500 billion to help struggling euro-zone countries, with Germany providing the largest share -- although Angela Merkel's recent refusal to consider upping that figure seems to be wavering under heavy pressure.

Italian Prime Minister Mario Monti believes the ESM should be doubled to €1 trillion, while there have also been calls from French President Nicolas Sarkozy for Germany to put in more money. European Central Bank head Mario Draghi shares that view as does International Monetary Fund boss Christine Lagarde. "We need a larger firewall," Lagarde said at a Monday appearance in Berlin. "Without it, countries like Italy and Spain, that are fundamentally able to repay their debts, could potentially be forced into a solvency crisis by abnormal financing costs."

The German chancellor has been adamantly opposed to such an increase, although that might be changing. Speaking at a press conference in Berlin on Monday with Belgian Prime Minister Elio Di Rupo, who had signalled his desire to see the fund increased, Merkel said: "Germany has always done what is necessary to defend the euro."

Germany's share of the ESM will amount to almost €22 billion in cash capital in addition to a further €168 billion in available capital. Discussions on whether to increase the size of the ESM will take place in March, a timeframe that had been agreed on last year.

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