Is the European Financial Stability Facility (EFSF) proving a success?
No. The EFSF continues to be underfunded by a huge margin and does not today place a credible firewall around Italy and Spain. What’s more, it lacks credibility as a rescue facility because the countries that are underwriting it are themselves in trouble—including not only Italy and Spain, but also, more recently and even more worryingly, France. EFSF loans together with IMF/EU conditionality, advice, and monitoring have failed to stabilize the situation in Greece; they have done better in Ireland and Portugal, but the jury is still out on whether their programs will succeed.
The recent attempt to leverage the EFSF’s relatively meager resources by turning it into a partial guarantee, instead of allowing it to function as a lending facility, remains unimplemented and in any event has entirely failed to convince the markets. Moreover, the attempt to entice private investors, as well as China and other countries with large reserves, to contribute to the fund has also failed, in part because third parties want to see Germany, France, and others put more of their own money on the line and adopt a far more convincing and unified approach to deal with the crisis.
The recent attempt to leverage the EFSF’s relatively meager resources by turning it into a partial guarantee, instead of allowing it to function as a lending facility, remains unimplemented and in any event has entirely failed to convince the markets. Moreover, the attempt to entice private investors, as well as China and other countries with large reserves, to contribute to the fund has also failed, in part because third parties want to see Germany, France, and others put more of their own money on the line and adopt a far more convincing and unified approach to deal with the crisis.
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For the EFSF to succeed in stemming the crisis, it would need an additional 2 trillion dollars. The eurozone’s healthy core may be able to come up with about half of this sum without itself falling prey to a destructive crisis of confidence, but the rest would have to come from outside the eurozone. This external infusion of funds would best be channeled through the IMF, which would then pose demanding conditions not just on the countries directly borrowing from it, but also find ways to demand changes in the eurozone’s institutional set up and monetary and fiscal policies in the healthy core, to ensure the euro’s long-term survival.
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