The European Commission sought to take centre stage in the euro zone’s ongoing debt crisis on Wednesday, with its President, José Manuel Barroso, unveiling an ambitious plan to tackle the region’s fiscal woes, even as Europe reeled from the Slovakian googly which saw the country’s parliament reject the crucial expansion of the euro zone’s bailout fund.
Presenting his proposals to the European Parliament, Barroso outlined five areas of action: a decisive response to the Greek problem, enhancing the euro area’s backstops against crises, a coordinated approach to strengthen banks, front-loading stability and growth enhancing policies, and building integrated economic governance for the future.
On the Greek issue, Barroso called for a quick disbursement of the next tranche of bailout funds, in addition to a second bailout package that would include “private sector involvement”.
He also urged a coordinated plan to increase European banks’ capital and called for a reassessment of the state of banks by supervising authorities, using a “temporarily significant higher capital ratio of highest quality capital after accounting for exposure”. Banks will thus be expected to increase their capital buffers, forcing them to build up risk-free assets that can absorb losses on bond investments.
The EC president suggested banks in need of recapitalisation use private sources of financing in the first instance, with national governments providing support if necessary. If this support proves inadequate, the euro zone’s bailout fund, the European Financial Stability Facility (EFSF), could be turned to. Pending recapitalisation, banks affected would be prevented from distributing dividends or bonuses.
Barroso’s plans reflect closely the ideas German chancellor Angela Merkel has been pushing for.
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The hope now is that EU leaders, still divided on how to deal with the crisis, will embrace the proposals at their summit in Brussels on October 23. However, France, worried about losing its triple-A credit rating, has already expressed its opposition to the idea of national governments being the first backstop for banks, preferring a scenario where the EFSF is turned to in the first instance.
The Commission also urged the quick implementation of the enhanced scope and funds of the euro 440-billion EFSF that had been agreed to by euro zone leaders in July.
However, late yesterday, Slovakia’s parliament voted against the decision to expand the EFSF, a step investors see as crucial to fighting the damage caused by the region’s fiscal crises. The coalition administration of Prime Minister Iveta Radicova subsequently fell.
Slovakia’s 5.4 million people make up less than two per cent of the currency bloc’s population and only a per cent of its total output. Nonetheless, without Slovakia’s approval, what has hitherto been the lynchpin of the euro zone plan to tackle the crisis, the expansion of the EFSF’s resources and mandate, including allowing it to buy sovereign bonds and recapitalise banks, will be thwarted.
The approval process for the EFSF expansion has already taken two months at a time when investors have been calling for quick and bold steps to stem the fiscal bleed. That the move has now fallen hostage to the domestic politics of one tiny country underscores the difficulties of the 17-member euro zone to react quickly enough to allay market fears.
Slovakian leaders have indicated another vote will be organised, perhaps as early as tomorrow, in which the EFSF modifications could be passed with the Opposition support. However, yesterday’s debacle is likely to intensify the debt crisis by creating even graver doubts about the ability of the region’s governments to undertake the more comprehensive measures necessary, such as those proposed today by the EC, to finally put out Europe’s debt and deficit fires and resolve the biggest current threat to the global economy.