After months of deliberation and a lot of bickering, the Eurozone’s finance ministers have finally launched the European Stability Mechanism.
The new scheme which is designed to provide a new source of funds to bail out struggling Eurozone economies and banks was launched yesterday at a finance ministers meeting in Luxembourg.
The European Stability Mechanism or ESM will have the ability to lend as much as €500 billion by 2014. Every EZ nation is contributing to the pot but it will be the Germans who will make the largest contribution. It is expected that they will cough up 27% of the cash.
The scheme will eventually replace the current bailout scheme, the European Financial Stability Facility. The EFSF has already lent over €190billion to Portugal, Greece and the Republic of Ireland. Critics of the schemes say that neither of them have enough firepower to save the Eurozone from further shocks with most believing that if Spain or Italy go the same way as Greece the €500billion won’t be enough. If both nations go that way then the ESM will become irrelevant.
“The good news is that by using the funding in a wise way to support bond purchases, you can probably stretch that money quite a long way,” Sarah Hewin, head of global research at Standard Chartered, “The real concern is if Italy becomes involved, if there’s a big shock to the system and a full bailout is required. Even 500bn euros aren’t enough to cover Spain and Italy for a full three-year programme.”
Despite the schemes launch the markets remain concerned over the state of the Eurozone and investor patience is growing increasingly thin with Spain. They had been hoping that Spain would formally request aid, (a key requisite for the ESM funds to be released). The Spanish government however has refused to accept that it needs further help after the country received a bailout for its troubled banking system earlier in the year.
Backing the Spanish position German Finance Minister Wolfgang Schaeuble said that Madrid did not need any further help.”Spain needs no aid programme. Spain is doing everything necessary, in fiscal policy, in structural reforms,” he said.”Spain has a problem with its banks as a consequence of the real estate bubble of the past years. That’s why Spain is getting EU help with banking recapitalisation.”
The ESM is set to be chaired by the Prime Minister of Luxembourg, Jean-Claude Juncker who is also the chairman of the Euro group.
The launch of the ESM “marks an historic milestone in shaping the future of monetary union”; Mr Juncker said after the inaugural meeting of the Euro group of finance ministers that makes up the fund’s board.
Countries will make their first payments towards the fund this week.
The EU economic and monetary affairs commissioner Olli Rehn, said: “It provides the Eurozone with a robust and permanent firewall and it provides us with a strong toolbox of effective and flexible instruments. Thinking of where we were two-and-a-half years ago when we had no instruments of crisis management, we had to create the Greek loan facility and the temporary European facility, we are moving forward and we are supplementing the economic and monetary union with one important building block, Nobody is in party mood, but I am less pessimistic for the moment for the Eurozone than in the spring.”
The Pound to Euro exchange rate is currently trading at 1.2382
The Pound to US Dollar exchange rate is currently trading at 1.6007
The Pound to Australian Dollar exchange rate is currently trading at 1.5684
The Euro to US Dollar exchange rate is currently trading at 1.2928
The Euro to Pound exchange rate is currently trading at 0.8076
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