Who will pay for the euro firewall?

January 27, 2012

By Hugo Dixon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Who will pay to strengthen the euro firewall? Berlin is still against increasing the size of Europe’s own warchest. But the rest of the world doesn’t want to raise the International Monetary Fund’s firepower unless the euro zone beefs up its own. If a deal is done – and that is still far from certain – it seems likely the Europeans will pick up about three quarters of the tab.

Consider the maths. There is as yet no explicit connection between the amounts of money that need to be put into the two bailout funds. But the IMF has let it be known that it thinks a total of $1 trillion extra is required on top of the $1 trillion that it and the euro zone already have committed in their funds. The idea is that this $2 trillion would be large enough to convince bond markets that even large countries such as Italy wouldn’t have any problem rolling over their debts.

In the IMF’s thinking, roughly $500 billion would go into its fund; and a similar amount increase the size of the European Stability Mechanism, the euro zone’s soon-to-be established permanent bailout fund.

There is nothing magic about rough parity between the two funds. But, in politics, there is some attraction in round numbers. This might suggest that the euro zone countries would only be contributing 50 percent to their own bailout. Yet that ignores the fact that they have also promised to contribute 150 billion euros to the IMF. If a deal was done on the basis of a $500 billion boost for both funds and the zone putting 150 billion euros into the IMF, its share of the combined bill would come to 70 percent.

Such a deal, however, looks tricky. Germany seems most unlikely to agree such a big increase in the size of the ESM. About the most it might be persuaded to do is to allow the unused funds from the European Financial Stability Facility, the zone’s existing fund, to be deployed in tandem with the ESM. That would provide an extra 250 billion euros at a European level. Assuming again that the rest of the world would only agree to boost the IMF by the same amount, that would imply the total firepower was increased by $650 billion. Assuming also that the euro zone was still good for its 150 billion euro contribution to the IMF, its share of the combined bill would be 80 percent.

Such an outcome wouldn’t please everybody. The IMF wouldn’t get as strong a firewall as it thinks is needed, Germany would have to fork out more cash than it wants and the rest of the world would still be contributing to help out countries which tend to be much richer than them. But a compromise along these lines might just work.

Calculator: Who picks up the euro tab?

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