The trillion-euro illusion

On 29 March, EU finance ministers claimed to have come up with the right numbers with which to shield the eurozone from a new crisis. But it is a sleight-of-hand accounting that could crumble at the first sign of trouble.

Published on 2 April 2012 at 14:48

In fact, there are no 1,000 billion dollars for the European Stability Mechanism (MES), the emergency fund that Spain and Italy will have to fall back on if bankruptcy threatens.

There are no 800 or 700 billion euros either, which are the amounts that the official declaration of the Ministers cites with pride. What De Jager and his European colleagues have rolled out is a sham. It’s a way of juggling numbers that undermines from the start the credibility of the relief fund, which will become operational on 1 July.

The foundations of this mathematical magic were laid down by the European heads of government. Last autumn, they decided that the combined lending capacity of the existing relief fund [the European Financial Stability Fund, EFSF, created in 2010] and the one yet to be created should be limited to a maximum of 500 billion – in their joyful message, they decided, particular emphasis would be placed on the number 500.

Bluff and leftovers

That there were only 300 billion euros of fresh money – since 200 billion from the older fund had already been used to save Greece, Portugal and Ireland from a rout – was passed over in silence.

In December the same leaders agreed to “reconsider” the amount of the combined fund – Brussels jargon for “increase”. The financial markets, the U.S., the OECD, the IMF had all grasped that even 500 billion fresh euros would not enough to prevent a targeted action by speculators against just one country (Italy) from spreading to the rest of the eurozone.

The European Commission then proposed a clear plan: by adding unused amounts of the old funds (240 billion) to the new MES, the sum would add up to 740 billion – the one trillion-dollar baby, which would convince the markets and encourage the IMF to beef up its war chest against the euro crisis as well.

Under pressure from Germany, this proposal was rejected on Friday [March 30]. With a wave of a magic wand, the European ministers released something even greater: 800 billion euros. This, it turned out, was the addition of the 500 billion already promised, plus 200 billion on loan from the old fund, plus the 100 billion from the initial emergency aid to Greece: leftovers, plumped up with smoke and mirrors.

It’s not the first time eurozone ministers have been guilty of bizarre arithmetic. The former relief fund was also christened the “one trillion dollar baby” at birth in May 2010. It was to include 750 billion euros – 500 billion from the EU and 250 billion from the IMF. Over the following months, the EU share shriveled to 250 billion as a result of additional safeguards needed to loan the money.

Primarily to serve as a deterrent

After much wailing from the political class, the countries of the eurozone decided to boost their contribution to 440 billion.The Chinese and the systems of financial leverage would multiply this amount by a factor of four or five. But afterwards we heard no more of the Chinese, or of levers.

**Five hundred billion, it must be said, is a lot of money for the MES. It’s enough to support the Spanish banks, if Madrid comes asking for it. But if the Spanish government and the Italian government knock on the door for the aid at the same time, the MES will not be enough.

According to the ministers, the goal is not to actually use the emergency fund. It’s there primarily to serve as deterrent. Ministers do like to roll out the “big bazooka” – hence their heart-throb for the “1,000 billion dollars”.**

Such a fund would be big enough to keep markets from entertaining for a single second any thought of launching an offensive against a weaker sister of the eurozone. It is precisely on this crucial point, however, that governments are undermining the defence line of the eurozone. For the second time in two years.

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