The race to succeed Klaus Regling as head of the euro rescue fund is open again. The German’s term of office ends on October 7th. Nevertheless, the two remaining candidates for the influential post withdrew their applications on Tuesday. This was announced by Irish Finance Minister Paschal Donohoe on twitter. Donohoe heads the Euro Group, the body of finance ministers from the countries with the common currency. He must now quickly find new applicants who are able to reach a consensus.
Regling has managed the European Stability Mechanism (ESM) in Luxembourg since it was founded in 2012. The fund can lend money to ailing euro countries if they have problems otherwise finding buyers for their bonds. As of 2018, five countries benefited from a total of €295 billion in cheap loans: Greece, Cyprus, Spain, Portugal and Ireland. A further 414 billion euros are still up for grabs – a huge sum.
The two remaining candidates were former finance ministers Pierre Gramegna from Luxembourg and João Leão from Portugal. The Luxembourger was supported by the federal government, the Portuguese by France and Italy, among others. This led to a stalemate. Then the voting rights of the 19 euro countries depend on how much capital they have made available to the ESM. This gives Germany and France, the two biggest supporters, a de facto veto right over this personnel decision. Italy alone does not have enough voting rights for a veto, but together with Portugal it does. The federal government thus prevented Leão’s appeal, and Italy and Portugal apparently jointly blocked the liberal Gramegna.
The Portuguese and Luxembourg governments seemed to see no other option but to agree to withdraw their applicants at the same time. Eurogroup boss Donohoe must now look for alternatives. An EU official said it was still expected to do so in time for Regling, then 72, to step down on October 7.
States fear the stigma
An important task for his successor will be to overcome reservations about the ESM, especially in southern Europe. Because in return for the cheap loans, the states have to commit themselves to business-friendly reforms. As a result, governments fear the stigma and political anger of asking for support from the fund. Curious result: governments even refrain from cheap loans if they exceptionally come without reform conditions. In the Covid crisis, for example, the ESM is allowed to transfer aid loans for the healthcare system without any conditions, but nobody asks for them, not even highly indebted Italy, which has suffered greatly from Covid.
The influence of the Luxembourg euro rescuers should Amendments to the ESM Treaty keep growing. The fund should have more say in which reforms promise recipients of emergency loans, and would thus be more similar to the International Monetary Fund. In addition, the ESM should be able to inject money into the euro zone’s bank resolution fund if bankruptcies overwhelm it. But Italy’s parliament has not yet ratified these adjustments; in Germany, approval is also pending because the Federal Constitutional Court has not yet ruled on an action against it.