See also: Eurozone Watch » Getting around the No-Bail-Out-Clause by Daniela Schwarzer on 20 February 2009

For a few weeks now, the debate about whether a bail out of an EMU country is a likely option has accelerated. A few days after we had argued in a syndicated piece for Project Syndicate which was printed by a number of papers across the world that the no-bail-out clause has no relevance in the current crisis and EU member states would bail out a EMU member with solvency or liquidity problems. Germany's Finance Minister recently added flavour to the debate. Only yesterday, it was reported that Steinbrück confirmed that EMU countries might bail-out a fellow euro-area country (read for instance Bloomberg on this).

On the same day, we had

FT.com / Brussels - ECB warns Germany against EU bail-out (February 20 2009)

The European Central Bank gave a thinly veiled warning to the German government on Friday not to violate the European Union's "no bail-out" clause, which prevents members of the eurozone from supporting other members that are facing rising public debt.

Jürgen Stark, ECB executive board member, told Spiegel magazine in an interview released on Friday that the clause was an "important basis for the functioning of the monetary union".

The warning follows reports that Germany was considering ways to help members of the eurozone that are facing fast-rising refinancing costs as investor fears rise about deteriorating public finances. Peer Steinbrück, finance minister, said this week that Germany would not remain inactive if the eurozone was in danger of breaking up.

Back to Daniela Schwarzer:

Let us, first of all, reframe the issue. If an EMU member country heads for a situation in which it cannot refinance its debt, it may not need a full bail out, but would indeed need financial assistance. For such an emergency action, Article 100 TEC, section 2 could be used as a legal base:  "Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision to be taken." The fact that EU member countries and the EU as such is not liable for the commitments of other member states (as stated in Article 103), hence does not imply that the Treaty assumes that fellow member states should go bankrupt.

Whether by issuing Eurobonds, which Schwarzer suggests, or by means of the EFSF, this can be done.

The issue really is the political stance that results in the EU (Commission, Council and Central Bank) consciously IMF'ing the member states in difficulties.

All this to prevent a default.

Economics is politics by other means