Scramble for cash

On December 9, the European Union's heads of states ordered their finance ministers to collect around 150 billion euros ($196 billion) in bilateral loan commitments for the International Monetary Fund (IMF), to be used to stabilize the eurozone.

They were given ten days to complete the task. This self-imposed deadline has now passed, and not much has happened. In a telephone conference, Europe's finance ministers established that Britain was not going to contribute its share, and that the German Federal Bank was hesitant. Only the Czech Republic, Poland and Sweden have made any promises, even though they are not eurozone members.

The head of the euro group Jean-Claude Juncker claimed after the conference that the 150 billion euros had been promised, but declined to mention any detailed figures.

Bank delays

The German Federal Bank, which represents Germany at the IMF, has its problems with the promises Finance Minister Wolfgang Schäuble is said to have made at the telephone conference.

As a result, the bank's president Jens Weidmann played for time and said there was no need to rush the decision. Indeed, the European Commission has now started to play down the importance of the ten-day deadline.

Weidmann added that the federal bank would only be able to pay out its 45-billion-euro share when it became clear that non-European stakeholders in the IMF would also contribute. So far, the US has refused any new loans, while Russia has agreed.

Bleak warnings

As the finance ministers were still haggling amongst themselves in their telephone conference, the European Central Bank was publishing dark economic warnings, especially for the first quarter of 2012. After Christmas, the highly indebted eurozone countries will need around 200 billion euros of fresh capital to replace government bonds and refinance themselves.

The ECB recently presented its stability analysis for the 17 eurozone members in Frankfurt, and one of its conclusions was that the financial systems, the markets and the banks were currently under more pressure than after the collapse of Lehman Brothers in 2008. Coupled with the prognosis that Europe could slide into recession next year, the ECB apparently believes the euro is an extremely precarious position.

Nevertheless, ECB boss Mario Draghi told the European Parliament on Monday that he didn't think it was possible that the euro would break apart. "The euro is irreversible," he said. He added that the markets had not sufficiently acknowledged the value of the plan to create a fiscal union within the EU without Britain.

At the same time, the ECB president also said he won't bow to pressure from highly-indebted eurozone countries to buy more of their state bonds, as this would amount to financing countries by printing money. Draghi told the parliamentarians in Brussels that this was not a viable remedy for the crisis.

Cheap money for banks

Instead, the ECB has come up with a new scheme: as of Wednesday, it intends to grant banks unlimited three-year loans at an ultra-low interest rate of one percent. This, it is hoped, will encourage the banks to lend each other money and provide commercial enterprises with capital.

This unprecedented step is meant to prevent a credit crunch and avert a new banking crisis. Market analysts predict the banks will leave their government bonds from crisis-hit states like Italy, Spain and Greece with the ECB as security on these loans. The banks could also use the cheap cash to buy short-term bonds from these states, since the high interest rates imposed on them promise healthy profits.

New union due in March

The EU finance ministers also agreed on Monday to try to get the new permanent European bailout fund, the European Stability Mechanism (ESM), up and running in six months. Schäuble has announced in interviews that Germany is prepared to inject its entire contribution to the fund in 2012. That would be 21 billion euros, which current German budgets had spread out over a series of payments starting in 2013. These payments now have to be brought forward.

European Council President Herman Van Rompuy is currently working on the first draft of the fiscal union contract, which all EU states apart from Britain are expected to sign. That initial draft of the contract could be discussed at a special summit of the heads of state as soon as end of January or early February.

If all goes to plan the contract should be signed in March and go into effect in the summer. Initial considerations suggest the agreement should be legally binding if nine of the 26 countries ratify it.

Author: Bernd Riegert / bk
Editor: Andreas Illmer