News

What to do about the eurozone bailout fund?

Good morning and welcome to Europe Express.

The eurozone’s own bailout fund, the European Stability Mechanism, will soon be looking for a new managing director to succeed Klaus Regling when his term ends this autumn. We’ll look at who might take over and why the ESM has been struggling to play a role of late.

Meanwhile, Nato foreign ministers have gathered in Brussels since last night, with their Ukrainian counterpart scheduled to join them today. We’ll explore the further assistance Nato members are expected to pledge to Ukraine and the long-term questions facing the alliance.

The fifth sanctions package on Russia is set to be approved later today by ambassadors, after finding broad support yesterday. If signed off, it will ban coal imports from Russia, bar trading with several Russian banks, and add several more names to the sanctions list, some coinciding with restrictions announced by the US and the UK.

The EU’s foreign policy chief yesterday made a stark comparison between the €1bn a day Europe is paying Vladimir Putin for energy imports and the €1bn the EU has allocated for arming Ukraine since the beginning of the war. With calls growing for the bloc to wean itself off Russian oil and gas, I’ll bring you the arguments that 11 EU countries — including embargo-wary Germany — are making for accelerating the Green Deal.

Laying low in Luxembourg

After its dramatic birth in the heat of the eurozone sovereign debt crisis, the European Stability Mechanism has had a more placid time lately, writes Sam Fleming in Brussels.

The eurozone bailout fund, and its predecessor the European Financial Stability Facility, created in 2010, played leading roles in resolving the sovereign debt crisis under the steady hand of Klaus Regling, the ESM’s German managing director.

More recently, however, the ESM has taken on a slightly forlorn air. The Luxembourg-based institution sought to play a role in the Covid-19 crisis, offering pandemic credit lines with minimal conditionality to help euro member states as their economies tanked.

But no capital drew on the loans. Rome was most prominent in turning up its nose, given the stigma that taints the ESM’s offer among sensitive Italian politicians.

This year’s headwinds are driven by the Ukraine war, skyrocketing energy prices and sinking investor confidence. The ESM has thus far not been touted as part of the solution — despite calls from some capitals for common fiscal firepower to be deployed in battling the crisis.

There are good reasons for this. The currency union has an activist central bank that is still immersed in its bond-purchasing programme. The EU also now has the NextGenerationEU common borrowing programme, worth up to €800bn, to help member states rebuild from the pandemic crunch. Thankfully no member states are currently suffering from dangerous market conditions that might prompt them to turn to the ESM’s conditional lending lines.

To some, this leaves the ESM, which has more than €410bn of lending capacity, looking a little like a sovereign Spac — a big bundle of funding searching for a purpose.

The topic of how best to deploy the ESM will jump to the fore as Regling prepares to step down from his perch this autumn. Speculation about whom the capitals will choose to succeed him was the topic of discussion on the sidelines of the eurogroup meeting in Luxembourg on Monday.

Finance ministers want to decide the matter as soon as May. One potential candidate is Luxembourg’s former finance minister Pierre Gramegna, who stepped down earlier this year. He is experienced and well-known in finance ministries, having made an unsuccessful bid at being eurogroup president in 2020.

It remains to be seen if he throws his hat in the ring, and the country’s finance ministry didn’t immediately respond to a request for comment. But other states might well field rival candidates — the Netherlands among them.

The question is whether the changing of the guard at the ESM will be accompanied by any new thinking about its role. Defenders of the status quo argue that it acts as an insurance fund that can quickly be called upon by a member state facing a financial crisis.

That role will be further expanded when treaty reforms creating an ESM-based backstop to the eurozone’s single resolution board for banks finally come into full effect. As one EU official puts it, “you don’t get rid of the firefighters just because there’s no fire.”

The problem, of course, is that economic fires have been flaring up in euroland. It’s just that the ESM isn’t being called upon to put them out.

Chart du jour: Trade slowdown

The value of global trade fell 2.8 per cent between February and March as Russia’s invasion of Ukraine led to a sharp drop in container ship traffic from the two countries, according to the Kiel Institute for the World Economy. (More here)

More troops. More weapons. More members?

Nato, as its leadership and members are at pains to state whenever possible, is not involved in the six-week-long war in Ukraine. But the conflict is nonetheless completely reshaping the alliance’s present and future, writes Henry Foy in Brussels.

Alliance foreign ministers will today attempt to set a road map for how to grapple with the vastly altered security arena, ahead of a summit in June that was billed as a moment to shift Nato’s focus towards emerging security threats such as China, space and cyber, but has instead been violently hijacked by the old, original enemy: Moscow.

With Ukraine on everyone’s mind — and its foreign minister in the room — the alliance is set to discuss pressing needs for Kyiv as Russia shifts its focus to the east of the country.

Julianne Smith, the US ambassador to Nato, has said allies “now feel even more compelled to take a fresh look at additional forms of assistance, individually, collectively, any way that we can”. With the Czech Republic having started sending tanks to Ukraine — the first time a Nato member has done so — don’t be surprised if other allies make similar moves.

“We are able to hear directly from [Kyiv] in terms of specific needs, particularly air defence needs that they may have or something else that has shifted . . . ammunition or anti-ship or whatever it may be,” Smith told reporters ahead of the meeting.

Alongside that, big questions loom about Nato’s future. Does it need more troops in the eastern states, more aircraft in the skies and more ships in the sea? And how permanent might these new deployments be?

But the biggest impact on Nato from the war could come in the shape of its membership.

Vladimir Putin’s invasion has sparked a surge in support for membership in previously reticent Finland and Sweden. Both are partner countries to Nato and already participate in some exercises — and in today’s meeting. One prominent question regarding their status is how to make sure that they are protected from any possible Russian attack in the period between applying to join and being formally accepted as a member.

Nato officials say they cannot be covered by the hallmark Article 5 mutual security guarantee until they are members, but privately suggest that may not be necessary: should Moscow enact its threatened “military-political consequences” in response to their applications, a majority of Nato members would likely choose to unilaterally come to their defence.

“I’m certain that we will find ways to address concerns they may have regarding the period between the potential application, and the final ratification,” secretary-general Jens Stoltenberg said yesterday. “We know that they can easily join this alliance if they decide to.”

Fast-track Green Deal

The war in Ukraine should not be used as an excuse to delay the EU’s climate ambitions, but instead accelerate the transition towards renewable energy, according to a joint statement by Germany, Spain and nine other EU countries.

“Now is the time to be bold and to move ahead with determination with the green transition. Any delay or hesitation will only prolong our energy dependence,” reads the statement, due to be published this morning.

The bloc’s proposed package of legislation, dubbed Fit for 55 and tabled last year, is bogged down in negotiations among capitals and the European parliament — as well as by the policy machine of the European Commission being hijacked to deal with the response to the war.

Given that the goal of Fit for 55 is to reduce the EU’s total gas consumption by 30 per cent by 2030 and contribute to full energy independence from Russian fossil fuels, “negotiations on the package should therefore be accelerated and ambitions ramped up”, the 11 signatories write.

The statement also promotes “options to diversify our energy supply”, in a way that “avoids lock-in effects of fossil fuel production and use” (meaning long-term contracts).

An interesting point is the focus on an “open and interconnected market-driven EU internal energy market”, given that one of the signatories is Spain, which insisted on government interventions to cap energy prices and decouple gas from electricity markets.

“In the midst of this unprecedented crisis and facing a severe economic downturn, we must resist the temptation to use fossil energy of the past,” said Dan Jørgensen, Danish energy and climate minister.

What to watch today

  1. Nato foreign ministers meet in Brussels

  2. EU ambassadors meet to finalise the fifth sanctions package on Russia

  3. Representatives of the biggest banks in Europe discuss sanctions compliance with European Commission officials

  4. Commission president Ursula von der Leyen visits Bulgaria and Sweden to approve their post-pandemic recovery plans

Notable, Quotable

  • Sanctions guidance: European banks are stepping up their complaints to Brussels about a lack of clarity on how to implement EU sanctions on Russia and a “misalignment” with equivalent measures imposed by the US and UK.

  • French inquiry: French prosecutors have opened a preliminary investigation into tax fraud and money laundering allegations relating to the government’s use of private consulting firms. The probe is a setback for Emmanuel Macron only days before the first round of the presidential elections.

  • Orban’s roubles: Hungary is prepared to meet Moscow’s demands for Russian gas to be paid for in roubles, President Viktor Orban has said in a challenge to the EU’s rejection of Vladimir Putin’s attempts to shift the terms of energy contracts.

  • Belgian blockade: Belgium has blocked financial transactions worth €196.4bn in line with EU sanctions on Russia, according to the ministry of finance. The unusually high amount for the relatively small country is due to the fact that Belgium is home to Euroclear, which specialises in settling securities transactions.

  • Covax injection: The Open Society Foundations are joining a funding initiative adding $200mn to the Covax programme that delivers Covid-19 vaccines to developing economies. A pledging conference aimed at fundraising $5.2bn for Covax takes place in Germany tomorrow.

Articles You May Like

Jamie Dimon says Ukraine war shows we still need cheap, secure energy from oil and gas
Trafigura’s shareholders and top traders to split $1.7bn in payouts
3 reasons why Ethereum price keeps rejecting at the $1,300 level
Trading Psychology: Why Trends Are Important
Just 8% of Americans have a positive view of cryptocurrencies now, CNBC survey finds