An Optimal Design for ESM (European Stabilization Mechanism)

This Policy Maker Brief aggregates the advice Re-Define has provided to a number of European Finance Ministries, the European Parliament and the European Commission in a single place and in a format best suited for decisions by the Euro group of finance ministers and leaders on the design of the permanent European Stabilization Mechanism.

How to double, treble or even quadruple the size of the EFSF?

At an effective size of €250 billion the European Financial Stability Facility (EFSF) is rightly perceived by markets to probably be insufficiently large in order to fulfil the need to support any of the larger Member States should they need to draw on the facility. That is why there is an earnest on-going discussion about the need to expand the size of the facility.

Many Member States are reluctant to provide additional support or guarantees for the EFSF so any tool that can help increase the effective size of the support the EFSF can provide without increasing the commitments from Member States would be very welcome. The full policy maker brief can be downloaded here.

Comments - Proposals on Bank Bondholder Bail Ins and Haircuts

A welcome step

“Throughout this crisis, EU governments put the interests of bank bondholders over those of taxpayers. This has eroded market discipline, imposed unnecessary and unfair burdens on EU taxpayers and shielded bondholders from the consequences of the risks they undertook. The Commissions’ proposals today will help draw a line under this costly policy mistake.”

“The crisis exposed the lack of a fair, predictable and market stabilizing burden sharing regime for both sovereign and bank bondholders. This proposal plugs a part of that gap.”

“A bondholder bail-in regime, properly implemented, can be good for financial stability, taxpayers and even for bondholders themselves if it protects against value destroying bank runs and bankruptcy.”

“Proposals to bail in or haircut bank bondholders can help 1) improve market discipline 2) bring about fairer burden sharing 3) protect taxpayers 4) stabilize the EU financial system.”

Restructure Debts - A Shadow Fiscal Union is not the Way

Each day seems to bring a new idea that proponents claim will get us out of the crisis. No matter which of these policy paths politicians eventually choose they are likely to find it blocked by neither Greece nor Ireland being able to repay all of their outstanding debts. The way out can only be cleared by a decisive restructuring of these debts – the sooner the better.

The EU is at a crossroads. One way is the high road towards a fiscal union and the low road takes us back to each state fending for itself, the paradigm that prevailed before Greece was ‘rescued’. Euro-federalists have suggested everything from minimalist E-bonds to a complete fiscal union. Sceptics have called for kicking troubled countries out of the Euro zone.

Political expediency and economic logic rules out such a break up and political stalemate and public opinion stand in the way of a fully fledged fiscal union. The only feasible option lies in the middle. Since the announcement of the Greek aid package, the EU seems to be moving along this mid-path towards a 'shadow fiscal union'.

Comments on Treaty Change, Irish/Greek Debt Restructuring

On EU treaty change

“The treaty change discussion might end up opening Pandora’s box.” “This was definitely not urgent and probably not even necessary to set up what will be a mechanism only for liquidity support not fiscal transfers.”

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