Begging for the Bazooka: Europe’s Dangerous Dream of Unlimited Money
This week, some euro-zone members have been calling for the permanent bailout fund to be provided with a banking license that would provide it with unlimited access to money from the European Central Bank. The “bazooka” option might help crisis countries in the short term, but it would entail massive risks in the long run.
The bazooka isn’t just the name of a portable American antitank weapon. Recently it has also become the synonym for a financial super weapon that is supposed to end the euro crisis once and for all. There also used to be a chewing gum called Bazooka that was sold in German supermarkets until the 1980s. Once the pink stuff got stuck somewhere, it was hard to get rid of — not unlike the current discussion about a euro crisis bazooka.
The bazooka debate heated up after a suggestion from some countries, including Italy and France, that the permanent euro rescue fund, the European Stability Mechanism (ESM), should be equipped with “unlimited firepower” through a banking license. In concrete terms, it would enable the ESM to borrow unlimited amounts of money from the European Central Bankand use it to shore up euro-zone member states threatening to buckle under the weight of the crisis.
Given that billions of euros have already been deployed in the euro crisis, the idea of unlimited credit seems risky to say the very least. Not surprisingly, the reactions have been intense. “A banking license for the ESM would mean firing up the money printing machine, which means inflation and nearly unlimited liabilities,” Patrick Döring, the general secretaty of the business-friendly Free Democratic Party, the junior partner in Chancellor Angela Merkel’s government coalition, told SPIEGEL ONLINE. “That is why the FDP cannot and will not allow a banking license to be issued.”
So how is it that the supporters of a bazooka have come upon their demands? Ultimately, it goes back to the basic problem of the euro crisis: Countries like Spain and Italy are suffering from mounting debt and worsening economic prospects. To borrow fresh money they have to offer investors higher interest rates to buy their bonds. That further increases their debt and uncertainty over the future, which in turn continues to increase the risk premium they must pay to investors.
For two and half years now, euro-zone countries have tried to break this vicious cycle. First they created rescue plans such as the European Financial Stability Facility and its successor, the ESM, which are intended to provide countries like Greece and Portugal with loans until they are able to borrow money independently on the markets again. To prevent the need for further emergency bailouts, the European Central Bank has also sprung into action several times. It bought large quantities of bonds from distressed euro-zone countries to place downward pressure on interest rates. In addition, the central bank made loans of more than €1 trillion ($1.23 trillion) available to European banks in the hope that the institutions would in turn invest at least part of that sum in government bonds.
But all of these efforts have been met with limited success — and interest costs have risen sharply recently, especially in Spain. The reason is that many investors are worried that the bailout funds will prove to be too small if other euro-zone countries ultimately need to be rescued. Spain and Italy alone could require around €1 trillion if they have to seek a bailout, estimates Bantleon, a fund company that specializes in bonds. Currently, however, the euro bailout funds are only capable of providing a total of €750 billion.