It has been referred to as “the bazooka” — the 500 billion euro European bailout fund that after much dispute will have its first board meeting on Monday.
Philippe Huguen | AFP | Getty Images
Dreamed up two years ago by euro zone ministers and officials as a permanent weapon against any financial problems that might besiege the region, the $650 billion bazooka might eventually be aimed at
Spain’s banking crisis. Or it could be wielded to scare off bond market speculators who might otherwise try to drive up the borrowing costs of beleaguered governments in Madrid or other euro zone capitals.
But as with many of the other improvised solutions to the euro zone’s problems, the bailout fund’s reality is less elegant than the theory behind it.
As euro zone finance ministers gather for their monthly meeting on Monday in Luxembourg, there is still considerable disagreement over how the fund —
known officially as the European Stability Mechanism — will work and how effective it will be at raising money. There is no certainty, in other words, that the bazooka can be ready to fire in time to help countries like Spain that are already in the throes of crisis.
To begin with, the bazooka is being introduced with most of its financial ammunition not yet loaded. That is because the fund will be the euro zone’s first in which the initial money will be paid in by the 17 members of the European Union that are in the zone, rather than taking the form of government guarantees.
Each euro zone government will contribute start-up money in amounts roughly proportionate to the size of the country’s economy. But once they are all in by 2014, those contributions will total only 80 billion euros. The first installments, totaling 32 billion euros, are due this Thursday.
The bazooka is to achieve its full firepower of 500 billion euros by selling European Stability Mechanism bonds in the open market, with the government contributions serving chiefly as collateral. The 500 billion euros are then supposed to backstop euro zone governments by a variety of means, including providing loans, buying those countries’ bonds or providing precautionary
