Finland and the Netherlands, the eurozone’s two most hardline creditor states, said on Monday that they would block expansion of the permanent European Stability Mechanism’s ability to buy sovereign bonds.
A European Council last week agreed that the ESM, which is set to replace the temporary European Financial Stability Facility next week, could be used in a “flexible and efficient manner” to lower the borrowing costs for eurozone governments. Highly indebted Italy and Spain had insisted that other European nations help them reduce interest rates on their debts to avert a deepening of Europe’s financial crisis.
Although the council statement gave no specifics, it was assumed that the bailouts fund would be empowered to buy government bonds which could reduce the interest rates that Italy and Spain pay on their loans.
The EFSF has so far only been used to finance government support for Greece, Ireland and Portugal. The ESM will be used to lend €100 billion directly to ailing Spanish banks.
The Finnish Government says it would not agree to enable the bailout funds to purchase government bonds directly, adding that the Dutch agree.
Prime Minister Mark Rutte said Friday that “the chance is very small” that he would consent to such a change even if, “The instrument exists but it can only be applied with unanimous support.”
A permanent change in the structure of the ESM would require unanimity among eurozone members but the treaty that established the fund allows for a 85 percent majority vote to spend the money however it sees fit, “where the Commission and the European Central Bank both conclude that a failure to urgently adopt a decision to grant or implement financial assistance [...] would threaten the economic and financial sustainability of the euro area.”
The Netherlands, which provides 5.7 percent of ESM funds, and Finland, which provides 1.8 percent, do not together hold the 15 percent of the votes necessary to block an emergency procedure—although their AAA credit ratings are vital to the mechanism’s credibility. Only France, Germany and Italy have the votes to unilaterally block a decision.
The emergency procedure was exactly what opponents of the ESM in the Netherlands cited as prove that it amounted to giving up Dutch sovereignty to Brussels. Geert Wilders’ nationalist Freedom Party and the far left Socialists therefore voted against the treaty but they were not in the majority.
The Socialists are now neck in neck with Prime Minister Rutte’s ruling liberal party in polls for September’s parliamentary election while Wilders appeals to conservative voters on the right.
In Finland, the populist True Finns and the Euroskeptic Center Party opposed the creation of the ESM. They accounted for 35 percent of the vote in last year’s election. The True Finns walked away from coalition talks at the time over the bailout issue, forcing liberal leader Jyrki Katainen to form a six party coalition with conservatives, Greens, social democrats and socialists.