Just a brief update on one of my earlier posts that explored whether the idea of ‘fault, not solidarity’ could serve as a normative argument to support the sort of wealth transfers (‘burden-sharing’) that will no doubt be required in order to resolve the Eurozone crisis.
One way in which such ‘burden-sharing’ might manifest itself would be in the recapitalisation of banks in peripheral countries like Spain, via the ESM. The precarious state of bank balance sheets throughout the Eurozone, including Spain, is without doubt one of the ‘legacy problems’ that my ‘Fault, Not Solidarity’ post highlighted, drawing on an idea set out in a report by the INET Council on the Eurozone Crisis. This is precisely the sort of problem that derives from ‘the original flawed design/perverse incentives of the EMU’ for which all members of the Eurozone should bear some responsibility. Addressing this problem via the ESM was certainly one of the implications, if not explicit agreements, of the Eurozone Summit in June. Eurozone leaders recognized in the very first sentence of their summit statement that it was ‘imperative to break the vicious circle between banks and sovereigns’. As Ambrose Evans-Pritchard wrote yesterday in The Telegraph: ‘The document said the ESM must be allowed to “recapitalise banks directly”, clearly referring to Spain’.
It seems, however, that the finance ministers of Germany, the Netherlands, and Finland apparently don’t see it that way. As a joint statement of September 25 made clear, in their view ‘the ESM can take direct responsibility of problems that occur’ only after a country has relinquished fiscal control under an ESM bailout and supervision memorandum. Otherwise, ‘legacy assets should be under the responsibility of national authorities’.
So much for recognizing shared ‘fault’ as a basis for dealing with this key portion of the ‘legacy problem’ that my prior post highlighted. As Evans-Pritchard concludes, the September 25 joint statement would seem to prevent the ESM ‘from recapitalising Spain’s crippled banks directly under a €100bn (£79bn) loan package agreed with Madrid in June. The burden will fall entirely on the Spanish state’. And he further elaborates: ‘The extra debt burden is likely to be around €60bn or 6pc of GDP, depending on bank stress tests to be unveiled on Friday. Pessimists fear it could rise to 15pc of GDP once full losses from the property crash are crystallised’.
I suppose we could call the proposed German-Dutch-Finnish approach to bank recapitalisation as ‘Neither Fault Nor Solidarity’.