The European stability fund must not be used to bail out stressed banks, according to the Finance Minister.
What we have experienced over the past year was a sort of slow strip-tease ofthe complete permanent solution
“The first port of call for banks that have to be recapitalised should be national governments, with the European Financial Stability Facility only used as a measure of last resort,” Tonio Fenech said.
This stand will be reflected in crucial discussions that will take place at a meeting of EU heads of government next Sunday, which coincidentally is one day short of the 82nd anniversary when the New York Stock Exchange crashed in 1929 signalling the start of the Great Depression.
The EU is at a critical juncture as some of the countries sharing the single currency are grappling with a sovereign debt crisis that risks spreading to other member states. This week’s meeting should provide the “final solution”.
On Wednesday, EU Commission president Jose Manuel Barroso in the European Parliament submitted a road map to save the eurozone from collapse, which included decisive action on Greece, accelerating the launch of the European Stability Mechanism and the recapitalisation of banks.
Mr Barroso said banks should first use private sources of capital, with national governments providing support if necessary. If this support is not available, recapitalisation should be funded via a loan from the EFSF.
Details of the proposals are still not available and according to Mr Fenech they will probably be presented formally after the G20 finance ministers meeting held yesterday.
Mr Fenech said Malta agreed with bringing forward the decision to create the European Stability Mechanism, a permanent bailout fund, which has been labelled as the European monetary fund.
“The urgency at this stage is to achieve market stability by tackling the debt crisis and avoiding contagion in the financial sector that may eventually lead to serious economic problems,” he said.
Markets will wait anxiously to see what European leaders will come up with but for Labour MEP Edward Scicluna, who is also vice president of the European Parliament’s committee on economic and monetary affairs, academics have long said what the solutions should be.
Prof. Scicluna said the eurozone “needs a minimalist federal fiscal union” which least interferes with the sovereignty of the member states. This means the EU will have the power to introduce taxes
“This includes some transfer payments between states over and above the current bailouts, a European or eurozone-wide tax, stricter conditionality, stricter collective fiscal surveillance, a more flexible, powerful and independent European monetary fund.”
Prof. Scicluna said the monetary fund should have the ability to function like a bank and launch eurozone-backed bonds taking the load off the back of the European Central Bank.
The solutions proposed by academics, he added, stemmed from the realisation that Greece was insolvent and not merely illiquid.
“The best European solutions kept EU political realities in mind, including legal constraints and worked a solution around them but because it was politically unpalatable to the German voter what we have experienced over the past year was a sort of slow striptease of the complete permanent solution,” Prof. Scicluna said.
Even though the EU has moved closer to uncover the final solution, Prof. Scicluna believes there is more way to go until it is executed and much will depend on whether international financial markets are convinced by Germany’s resolve to tag along.
But economist Karm Farrugia finds solace in Mr Barroso’s statements and those of the European Central Bank and the International Monetary Fund.
“They have at last recognised the reality of the situation and that solutions cannot be reached in a piecemeal fashion,” Mr Farrugia said. He was hopeful that a lasting solution would be found because the world risked entering into an even deeper recession than the one experienced two years ago.
The seriousness of the situation, he added, was such that unanimity in decisions was no longer an option.
“When eurozone countries like Greece took advantage of the safety provided by the single currency to go beyond what was economically wise and also doctor their financial accounts they should have been kicked out,” Mr Farrugia said.
The onus now lies on the EU heads of government as they walk the tightrope between failing countries, uneasy markets and growing popular discontent.
“I hope politicians stand up to the challenge and better the proposals put forward by the technocrats,” Mr Farrugia said.
ksansone@timesofmalta.com