On Monday January 23, 2012 the finance ministers of the eurozone member-states, met to discuss issues related to the ongoing crisis of the Euro. The discussion focused on two issues: (1) the negotiations for the restructuring of the Greek sovereign debt, under the (ill-advised) PSI programme, (2) the necessary preparations for the establishment of the region’s permanent bailout fund, the ESM, which is due to operate by July this year. With respect to the PSI programme, all that needs to be said within the context of this article is that European leaders are searching for the most suitable set of euphemisms to present the mere fact that the original idea was irrational and has proven to be to the detriment of both Greece and the EU as a whole, since it has given the power to bankers and hudge funds (mostly) to blackmail nations.

Now as far as the ESM is concerned, one needs to take into account the following:

• The ESM has an expected lending capacity of 500bn euro – Its actual capital basis is 80bn euro.
• For the ESM to reach its expected maximum lending capacity, it has to be leveraged, by issuing debt (by lending money)
• The EFSF was also supposed to be “leveraged” up to four or five times, from its 250 bn to up to 1 or 1.2 trillion euro. Despite the triumphant rhetoric that accompanied that decision (October 26 council), the truth was that nothing happened. Contrary the EFSF is gradually facing increased borrowing costs.
• Several politicians such as Italian Prime Minister Mario Monti and the head of the IMF, Christine Lagarde have time and again stated the need to “build a firewall” to protect countries like Italy and Spain from being caught in the “fires” of the crisis that are burning in Greece and elsewhere.
• Building a “firewall” can mean three things within the current context (i) leverage of the ESM, (ii) increased contributions by all states, including those mired in recession or those who need be protected, (iii) the ECB engages in unprecedented unconventional monetary policy (“printing money”) to lever up the ESM, as well as the area’s private banks (as it is currently doing thus creating artificially low interest rates).
• Any of the above three options comes with great costs, while its implementation is not certain to lead to the desired results. Point (i) suggests that some source of wealth will be willing to lend the ESM, thus depriving that amount of money from probably the real economy. Point (ii) means that hardly-pressed countries and others who still happen to be in a better position will have to increase the burdens on their (their taxpayers) shoulders. This is politically speaking very undesirable, thus almost impossible. Point (iii) verges on conflicting the EU Treaties themselves, as far as the mandate to the ECB is concerned. Though the ECB is already functioning in the “grey zones” of the legal boundaries, it will definitely pass the line if it has to lever up the bailout fund by producing billions of euro out of “thin air”. Let alone that this too is unpopular as it will lead to inflation over the medium term. The cost in that sense will be quite high.
• Politically controversial decisions, or broadly speaking unpopular policies, will never be agreed upon in the following months, because of the upcoming presidential elections in France, and the national elections in Germany the next year.

After considering the above, which only outline the context within which policy-makers are currently operating; one can proceed in evaluating the last Eurogroup meeting. On the face of it things are looking relatively good as European leaders seem to have the situation under control and every piece of the puzzle seems to fit in the grand scheme. In truth however, too much effort has been placed on policies, who will at best buy some additional time for the EU. The fiscal compact, the ESM, the restructuring of the Greek debt are all half-measures who address some of the symptoms of the crisis. So far no policy has been discussed with the aim of addressing the causes of the crisis, which are related to the black holes that exist in the European banking system; the divergence between peripheral and core countries within the euro area resulting from structural trade imbalances; the (increasing) obstacles to international trade and optimal internal trade/entrepreneurship coming from broader EU legislation; the entire European “growth” and “social” model both with respect to the EU and on a country-by-country basis.

The big issues are left untouched, as policy-makers spend all of their time in dealing with the side-effects of the structural malignancies of the European Union, which unfortunately represents more of a bankrupt household (or fortress?) that has closed its doors to the rest of the world. The ESM will sooner rather than later prove to be another European non-solution just like all the previous poisonous remedies that European leaders enacted to tackle the crisis.

First thoughts on the ESM: Another European non-solution | Protesilaos Stavrou.