Working for Tonbridge and Malling with Liz Simpson
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European Financial Stability Facility & European Financial Stabilisation Mechanism
In so many matters nowadays, the expression 'the devil is in the detail' is quoted. At times this is becoming too much of an excuse for pronouncing conclusions aimed at markets, without realising that a less than fulsome follow-up negates the conclusions, or even does more harm than good. I said this again about Bank stress tests, where we need transparent and credible assumptions as well as results, I said it earlier when it was taking too long to come up with detail on the Greek rescue, and the Committee has in fact been demanding more detail for months. We are the devils that look at the detail, and we want it.
On 11 May the European Stabilisation Mechanism was established, utilising the EU budget. It had taken so long to deliver on the earlier promises that this was not enough, so on 7 June the more general European Financial Stability Facility was created. Would not a bit more haste have been useful, and cheaper?
There are potential knock on effects as a result of these new instruments, for the EU budget, and also for borrowing by other EU institutions such as the EIB. It would be damaging if once again there has, in effect, been a bail out arranged for banks holding sovereign debt, and lending to SMEs in the real economy pay the price. So what plans are there to mitigate such an effect given that growth is so important to recovery and SMEs will be in the vanguard of that?
Concerning the SPV itself, in the interests of EU solidarity, those countries that are not in the Eurozone but wish to join Stabilisation Mechanism, should be able to do so. Can you confirm that the rules of the SPV are being changed to permit this? Indeed, more generally as was raised in Committee yesterday, we would like to know more about this off balance sheet vehicle, Member State`s accounting treatment of it and the advice for setting it up.
There remain many other questions. How will the coordination between the Stabilisation Fund and the IMF operate? Will allocation be made on a 2:1 basis reflecting the pledged amounts, and what is the relationship between the respective interest rates? Will the EU and IMF loans rank pari passu, or will only IMF loans benefit from exclusion in any eventual restructuring of the borrowers obligations? Indeed is this the right way round, should the IMF be topping up an EU rescue or should it be the other way round?
Is the SPV active or must first calls use the EU budget?
I would now like to turn to Eurobonds. There is a fundamental question to face here in that if there is a general Eurobond with a common interest rate then one of the most powerful incentives for fiscal discipline - market forces - is lost. Market forces are not popular right now - they were in fact sleeping as Greece and others ratcheted up debt much earlier on. But there are reasons for that embedded in the zero risk weight applied to sovereign debt in the Capital Requirements Directive. Had that not been there, banks would progressively have been weaned off riskier bonds, spreads would have reflected better the fiscal positions of Member States, we would not be bailing banks out again via the Stabilisation Mechanism and the forthcoming stress tests would be a whole lot less stressful.
As part of the new economic governance surely this has to be fixed in the longer term, and I would say automatically, not as part of a politically determined excessive deficit procedure. Indeed, there is the potential turn what is now a problem into a useful tool.
Since the writing of the Oral Question, I am pleased that the Commission has indicated its intention to involve the Parliament in the economic governance and surveillance procedures.
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