EU urged to set up permanent bail-out fund

Leading economists say mechanism is needed to cope with serious market disruption.

Germany has come under increased pressure to agree to the EU setting up a permanent mechanism to provide emergency financing to eurozone countries on the verge of default.

A group of economists, including Tommaso Padoa-Schioppa, a former Italian finance minister and member of the European Central Bank’s executive board, and Peter Bofinger, a member of the German Council of Economic Experts, wrote in an opinion piece in today’s Financial Times that a permanent mechanism is of “critical importance” to the eurozone’s ability to “cope with serious market disruption”. “Action is required now,” they wrote.

The economists are supported by Jacques Delors, a former European Commission president, Romano Prodi, a former Italian prime minister and Commission president, and Guy Verhofstadt, the leader of the Liberal ALDE group in the European Parliament.

Essential step

Supporters of the idea argue that it is an essential step if Europe is to reassure markets about its economic stability and prevent a repeat of the EU debt crisis that occurred earlier this year.

The piece follows (albeit guarded) support from the European Central Bank (ECB) for the eurozone to equip itself with a permanent “crisis management institution” to help countries in difficulty. The ECB said in June that such a mechanism could be needed “if the risk of debt crises were to become relevant even under reinforced fiscal and competitiveness frameworks”.

The Parliament’s economic and monetary affairs committee is expected to come out strongly in support of a permanent mechanism on 5 October, when it votes on its opinion on how to reform economic governance in the wake of the EU debt crisis.

The debt crisis was triggered by market concerns that Greece, and then other member states, might default on their debts.

The crisis was resolved only after eurozone governments agreed in May to create a €440 billion European Financial Stability Facility (EFSF) to help governments in difficulty – a step which reassured the markets. The facility is, however, only planned to have a three-year lifespan.

The Commission said in May that the EU, as part of its plans to strengthen shared economic governance in the wake of the crisis, should agree to create a permanent version of the EFSF.

German opposition

The German government, however, has made clear that it is opposed to this approach, as it could weaken the pressure on governments to take the tough decisions necessary to maintain sound public finances.

Germany prefers instead the establishment of a mechanism that could allow eurozone countries to, as a last resort, carry out an orderly default on their debts – an idea strongly rejected by most governments and the ECB.

The authors of the opinion piece in the Financial Times argue that the two ideas are not incompatible. They write that “a decision to make the EFSF permanent should not exclude sovereign insolvencies in the eurozone”. “An orderly procedure for sovereign debt restructuring is needed and should be agreed in parallel.”

Other eurozone governments, notably France, are understood to be open to discussions on making the EFSF permanent. The issue is likely to rise up the political agenda over the coming weeks as a ministerial taskforce seeks to wrap up discussions on a comprehensive package of economic-governance reforms ahead of a summit of EU leaders on 28-29 October.

Jean-Claude Trichet, the president of the ECB, took a cautious approach yesterday when questioned on the issue by MEPs. “We must work on ways to prevent [crises] rather than ways to cope,” he said – a reference on ongoing work to reform the EU’s sanctions regime for countries that run irresponsible fiscal policies.

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