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EU launches European Stability Mechanism

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EU launches European Stability Mechanism

The European Stability Mechanism (ESM) has been officially launched in the latest effort to safeguard eurozone economies.

Germany is contributing more than a quarter of the total going in to the €500 billion rescue fund, which will be used if a member of the eurozone needs additional financial support.

The ESM has so far received a mixed response from analysts, as they are concerned more money might be needed in order to stop the financial bloc from collapsing.

Sarah Hewin, head of global research at Standard Chartered, commented: "The good news is that by using the funding in a wise way to support bond purchases, you can probably stretch that money quite a long way."

However, she told BBC News that if a country such as Italy ends up needed a full bailout, €500 billion will not be enough to support the country and Spain over a three-year period.

Foreign exchange specialist HiFX added that the ESM appears "confusing and similar to a jigsaw puzzle rather than a pure solution".

Nevertheless, director of risk advisory services at the group Tim Kirkham acknowledged it does demonstrate the EU intends to become more unified and is "willing to give unlimited support to the euro".

Indeed, he said that even though Germany is frustrated about the "financial behaviour of some of the peripheral economies" in the EU, the general consensus is to protect the currency.

Mr Kirkham stated that if Italy and Spain continue to follow an austerity agenda, there should be sufficient cover. However, he said the success of the ESM and the European Central Bank will depend heavily on what happens in these countries in the long term.

He added that the UK has demonstrated that cutting spending inhibits economic growth, but pointed out that any immediate costs need to be considered against the gains that may be experienced in subsequent years. However, Mr Kirkham admitted this will not be "an easy solution" for people in Greece who are dealing with cuts, such as workers and pensioners.

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