European finance ministers held yet another summit this week. They agreed to release aid for Greece and discussed ways of boosting the eurozone rescue fund, the European Financial Stability Facility (EFSF). Another idea doing the rounds this week was a Franco-German initiative to centralise control of national budgets, a move towards fiscal union. The hope is that concrete new ideas will emerge at another summit on 9 December. Italy paid an unsustainable 7.9% to borrow for three years. Major central banks attempted to ease the eurozone credit crunch by making it cheaper for banks to obtain dollars.
What the commentators said
Not long ago, the hope was that the EFSF could be turned into a “big bazooka”, said Peter Hoskin on Spectator.co.uk. Europe’s leaders “have barely managed a cap gun”. There was talk of leveraging the fund, which currently contains €250bn, up to €1trn. But outside investors, such as sovereign wealth funds, have been loath to stump up and the fund itself, which has to raise money in the markets, has had trouble doing so. The EFSF is not going to raise enough money to convince investors it can bail out Italy or Spain and help plug holes in Europe’s banks by itself. It will have to act “together with” the International Monetary Fund (IMF) and the European Central Bank (ECB), admitted Luxembourg’s finance minister Luc Frieden.
Quite how this might work is unclear. What is clear, however, is that “in the short term only the ECB has the ability to change markets’ perception” of the situation, said Gary Jenkins of Evolution Securities. It can restore confidence by buying up peripheral debt on a huge scale with printed money, allaying fears of impending defaults. But Germany remains reluctant to allow this. So there is an “ever-present risk”, said Hugo Dixon on Breakingviews, that by the time policymakers get round to implementing a new plan, the eurozone could “have exploded”.