Up to Two Trillion: Europe Plans to Leverage Euro-Zone Bailout Fund

Officially, the ESM permanent euro-zone bailout fund is worth 500 billion euros. That, though, might not be enough, which is why euro-zone governments are now planning to introduce levers that could mobilize up to 2trillion euros, SPIEGEL has learned. Finland, though, is skeptical of the idea.

German Finance Minister Wolfgang Schäuble is in favor of leveraging the ESM. Here, during his 70th birthday celebrations last week. Zoom
DPA

German Finance Minister Wolfgang Schäuble is in favor of leveraging the ESM. Here, during his 70th birthday celebrations last week.

With the launch of the permanent common-currency bailout fund, the European Stability Mechanism (ESM), just around the corner, euro-zone member states are looking into ways to leverage the €500 billion ($647 billion) available to the fund, SPIEGEL has learned. But with Finland still concerned about the leveraging plans, it is unlikely that they will be initially included when the ESM is launched on Oct. 8.

The plan envisions the continuation of leverage instruments currently in use in the temporary euro bailout fund, the European Financial Stability Facility (EFSF). Should they be applied to the ESM, the permanent fund could be able to mobilize up to €2 trillion instead of the €500 billion lending capacity it currently has -- a size that would make it easier to provide emergency aid to countries as large as Spain and Italy, for example.

The leveraging proposal was a focus of last Friday's meeting of euro-zone finance ministers in Cyprus. German Finance Minister Wolfgang Schäuble is in favor of the plan, sources told SPIEGEL. But Finnish Finance Minister Jutta Urpilainen is worried that such a change is dramatic enough that it would require the ESM to be resubmitted to Finnish parliament for approval.

Plans for leveraging the ESM envision creating a vehicle to attract private investors as was created for the €440 billion EFSF last year. For the temporary fund, the plan called for protecting investors against the first third of losses they might sustain on purchases of EFSF bonds. In addition, to attract additional private funding, potential investors were promised that the euro zone would cover the riskiest portion of, for example, purchases of Spanish government bonds. Private investment would cover the rest of such purchases.

Finland, however, is worried that adopting such a plan for the ESM would conflict with the ESM's preferred creditor status, which stipulates that the fund be paid back prior to other creditors.

Bank Oversight Delayed

The plan has also been met with skepticism by opposition parties in Germany. Members of the center-left Social Democratic Party and of the environmentally minded Greens demanded that any concept for leveraging the ESM be discussed in German parliament. The far-left Left Party criticized the plan because it would mean "much more risk for taxpayers," as deputy party head Sahra Wagenknecht told the daily Passauer Neue Presse.

Finance Ministry State Secretary Steffen Kampeter, of Chancellor Angela Merkel's Christian Democrats, said on Monday that German parliament would of course be consulted. "One doesn't have to request that the government adhere to the law," he said on Monday.

The ESM lever isn't the only crisis-related tool that is likely to come later than originally planned. According to European Parliament President Martin Schulz, the European Commission's plan for introducing joint oversight of banks in the euro zone by the end of the year is looking increasingly unrealistic.

His comments came on the heels of a meeting between Merkel and French President François Hollande on Saturday in Ludwigsburg to commemorate Charles de Gaulle's watershed 1962 speech on Franco-German postwar reconciliation. During the meeting, Hollande pushed for an introduction of bank oversight as quickly as possible while Merkel was more cautious in her comments. Paris would like to make the European Central Bank responsible for overseeing all 6,000 banks in the euro zone whereas Berlin only wants the ECB to watch the zone's biggest banks. She also seems to be in less of a hurry to introduce the oversight system.

cgh/SPIEGEL

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