ZEW Expert on the Legislative Package ESM/Fiscal Contract

"The European Fiscal Contract hasn't got anything to do with stubborn austerity policy", clarifies Dr. Friedrich Heinemann. The head of the Research Department "Corporate Taxation and Public Finance" at the Centre for European Economic Research (ZEW) in Mannheim in fact indicates that improved national debt limits signal a turn towards a sustainable fiscal policy. This allows countries to regain market confidence, even though the current deficits are still high.

On occasion of his attendance at today's expert hearing at the German Bundestag concerning the European Stability Mechanism (ESM) and the Fiscal Contract, Heinemann evaluates the new agreements in principle as satisfying: "The ESM and the Fiscal Contract are elements of a basically consistent strategy. The support mechanism is tied to the requirement of more rigorous fiscal rules. This is an important package deal."

According to Heinemann, it is crucial for the implementation to clarify unresolved issues concerning the details: it has not yet been regulated, if and how fast an excessive deficit has to be compensated for by special consolidation efforts in the following years. The European Commission should define a precise and effective adjustment mechanism, the ZEW researcher demands.

From a German perspective, the permanent bail-out package ESM provides sufficient security that Germany as a guarantor and loaner cannot be forced to agree to contributions against its will. Respective decisions against a German veto are eliminated by the ESM voting procedures. The ESM voting procedures would eliminate such decisions due to a German veto. Also the type of liability – every country is liable only up to a exactly defined maximum limit – is to be welcomed. The liability within the ESM is hence much more calculable than the joint and several liability of many ”Eurobond” ideas. These would, in a worst case scenario, impose liability for the full amount of responsibilities of every single guarantor.

Heinemann also points at a deficit of the ESM contract: the insufficient involvement of the private sector in case of a threatening insolvency of the eurozone countries. The involvement of the private sector is only cautiously mentioned in the contract as “exceptional case”. This increases the danger that Germany will really actually lose its claims, since insolvent countries will not be able to pay their obligations towards the ESM on a permanent basis without the involvement of the private sector. Heinemann thus urgently advises the German Bundestag to insist on an early involvement of the private sector in case of a threatening insolvency of eurozone countries.

For further information please contact

PD Dr. Friedrich Heinemann, Phone +49 621/1235-149, E-mail Heinemann@zew.de