May 22, 2018
A €60bn ESM credit line - is this what they call a backstop?
The FT has seen a draft proposal by the euro working group for a fiscal backstop to the single resolution fund (SRF). It consists of a measly credit line of up to €60bn. What this tells us is that this is not a fiscal backstop at all - just another under-funded facility. This sum would not cover the failure of a large European bank. And even that limited facility would come with a quid-pro-quo ,in the form of phased risk-reduction measures in the banking system. We wonder: is that a good deal, for example, for Italy?
France and Germany are still insisting that they are on target to find a compromise on eurozone governance reform ahead of the June European Council. The European deposit insurance scheme is already dead and buried, however.
The eurozone governance reform is to a large extent now sidelined by events in Italy. The new Italian government will almost certainly not accept the Franco-German blueprint without interjecting its own rather different reform ideas. There may be a small intersection in the positions of France and Germany. But that intersection does not meet Italy's position.
A group of 154 conservative German economists, meanwhile, want to harden the German position even further. They published a letter in FAZ in which they rejected the fiscal backstop to the SRF; the change in the legal basis of the ESM; deposit insurance; a European investment fund; a fund to support structural reforms; or a eurozone finance minister and budget. In short, the entire agenda of Emmanuel Macron is rejected. We wonder why they even bother, as hardly any of it will survive anyway. The bigger fights are yet to come.