A trillion euro for Eurozone firewall
EU leaders, with the exemption of British Prime Minister David Cameron and his Czech counterpart Petr Necas, agreed on 30 January in Brussels on the principles of the new Union treaty 'Fiscal Pact', which provides for strict controls and severe punishments for member states that do not comply with government budget-deficit restrictions.
This development is supposed to increase market confidence in the Eurozone and the first positive signs are already evident in stock exchanges all over Europe and the world – the euro gained much ground on 31 January, rising to around 1.32 with the dollar.
The final agreement on the Pact is expected to be officially concluded during the next EU Summit in March, but the Necas decision to follow London's options has triggered a crisis in the Czech governing alliance, with Foreign Minister Karel Schwarzenberg openly accusing his prime minister of harming their country's national interests.
A number of EU leaders said that the Treaty will encourage the European Central Bank (ECB) to support the Eurozone countries in distress – later on, David Cameron clarified that Britain will not block the use of the Fiscal Pact by European institutions, because it was in the interest of his country, he said. “It is in our national interest that those countries go ahead and put an order to the chaos which is called the Eurozone.”
'Golden rule'
The new Fiscal Pact comprises a 'golden rule', according to which no country will be allowed to run a structural deficit greater than 0.5% of its GNP. The ceiling for the regular government budget deficit (including interest payments on debt) will be maintained at 3% of GDP, but anything above that will be punished by a levy of 0.2% of GNP and the country will be cut off from structural funding.
The 25 EU leaders also decided that the European Stability Mechanism (ESM) will be activated on 1 July 2012, one year earlier than was initially planned. The total firepower of the ESM, which is to replace the present European Financial Stability Facility (EFSF) will be around €500 billion. In March, the leaders will examine the possibility of increasing the ESM’s firepower, in order to be able to take care of problems in larger countries such as Italy and Spain, if there is a need.
Most probably, the ESM's firepower will be increased by €250bn in the form of guarantees, available at present through the now-operational European Financial Stability Facility. The ESM aid will be available only to countries that participate and which promptly apply the new fiscal discipline rules.
In addition, the surplus Eurozone countries have already started to deposit their increased participation with the International Monetary Fund – these new funds are expected to top up the IMF's firepower by €200bn, to be used only to support Eurozone countries in distress.
In this way, almost €1 trillion will be available in total, thus building a resistant firewall around countries in distress, while at the same time protecting the rest of the Eurozone from debt contagion.
In view of this, the capital markets reacted positively and gained much ground on 30 and 31 January, with the Athens Stock Exchange rising by 3.5% by mid-day Tuesday.
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