If you want to make a bid successfully in a negotiation, the other side has to believe that you mean what you say. Partly that is a question of bidding effectively by clearly addressing the motivations on the other side of the table. Partly it is a question of marshalling your bargaining power so that the other side feels that your bid has enough weight to be convincing.

The institutions of the Eurozone have been in a long running negotiation with the financial markets. The objective has been to persuade the financial markets that the Eurozone has a credible plan for dealing with its indebtedness. That way, investors can safely continue to buy government bonds, rather than starve governments of further investment, or pricing their investment at such high interest rates, that the debt collapses beneath its own weight. If a collapse occurs in any country then that country can no longer realistically remain part of the Euro.

I have written a number of blogs on this subject lamenting the uncertain series of previous “bids” made by the Eurozone institutions to persuade the markets that it has a credible strategy to cover Greece, other struggling countries like Portugal and Spain, and the Eurozone generally. Previous efforts to create bail-outs and/or guarantees have seemed piecemeal and unconvincing – it’s almost as though the Eurozone institutions feel that the process of discussing potential proposals is more important than the answers created. This buys them enough time that an actual answer may appear from somewhere else.

Sometimes these interim measures have bought a temporary respite, but usually once the financial markets have digested the announcements, they have given the proposals the thumbs down and so the crisis has continued. Now the Eurozone has for the first time put together an approach that sounds a little more convincing. This may be an effective bid. The next question is do the Eurozone institutions have sufficient bargaining power to make that bid seem convincing?

The Eurozone’s latest bid to solve the crisis has two elements:

1) It now has in place the new European Stability Mechanism (ESM), a 500 billion Euro agency to lend to distressed countries which need lasting support. The ESM will be able to lend directly to governments. It will also, once a new supervisory body is established, be able to support the recapitalisation of European banks struggling under their own debt burden. These funds would be made available in return for commitments to reduce indebtedness of the country concerned – through spending cuts, tax increases and, possibly, measures to stimulate the economy, such as making labour markets more effective.

2) The European Central Bank (ECB) has announced that it is ready to buy government bonds that are already available in the markets in “unlimited amounts”, although only for periods of maturation of up to 3 years. However, the ECB is only willing to take such action if the country concerned has sought help from the ESM and agreed a programme of austerity-type measures.

This two-pronged strategy is a clear approach which is directed at meeting the reassurance needs of investors in the financial markets. There was an immediate positive response to the ECB initiative announcement last month with bond yields falling in Spain and Italy.

Who Holds the Aces?

However, do the Eurozone institutions have the bargaining power to sustain the credibility of this “offer”? The picture is not that reassuring. Here are five typical bargaining power “aces” – how many of these can the Eurozone institutions honestly say that they have?

• Expertise – undoubtedly this is present, but the perception of expertise has been severely weakened by the vacillation over the last 2 years in creating a credible response.

• Authority (e.g. based on reputation) – this is much diminished for the same reason.

• Size – scale is often a source of bargaining power, but only if you use your size effectively. There are 17 Eurozone countries but they have not really harnessed their scale in this crisis – not least because of divisions between them on how to solve it. Those divisions were evident again in the ECB’s bond-buying announcement – Germany’s Bundersbank President, Jens Weidmann, was against the proposal and was out-voted.

• Market power – there must be concerns that the Eurozone institutions are in a position of weakness when it comes to market power because a lot of the apparent collective market strength behind these joint initiatives is based on a number of illusions.

– Firstly, the ECB does not have limitless money to engage in its bond-buying programme, so ultimately it may need to print money to support its interventions. That may create its own inflationary pressures. The financial markets will be aware of that risk and it may diminish their long term confidence in the reassurance provided by the strategy.

– Equally the ESM does not have all the funds it needs right now. It will only have 80 billion Euros in direct contributions from member governments till 2014, and will have to borrow the rest. When the member states pick up the rest of the tab, two of the largest contributors are scheduled to be France (20%) and Italy (18%). Given the fragile nature of their financial position this does not bode well either – it’s easy to see France and Italy needing to use the facility themselves in due course.

– Even with its full fire power there is concern that the ESM does not have sufficient funds to meet all the demands that may be placed upon it – e.g. if Spain and Italy both need a full bale out bale out, there will not be enough to cover the requirement.

• Personal power – you always have your own skills as a negotiator to fall back on in any negotiation, in order to help you make the most of what you’ve got. Whether the experience of the last two years of turmoil gives us confidence in the negotiation skills of key characters like Angela Merkel and ECB chief, Mario Draghi, is another question…

So, the Eurozone institutions may have finally come up with a coherent plan, but they may still be a bit short of bargaining power to make their proposals stick. Furthermore, the IMF is painting a gloomy picture of the financial health of the EU, warning that the Euro area’s debt crisis is the main threat to global financial stability, which has weakened in the last six months to leave confidence “very fragile”. THE IMF has cut forecasts in growth within the Eurozone from -0.3% this year and 0.7% next year to -4% this year and 0.2% next year. This kind of prognosis further weakens the “authority power” of the Euro institutions and means their recent proposals will have less weight with the financial markets.

The Eurozone may have finally assembled a sensible hand, but whether it has enough bargaining power “Aces” to win this particular game of negotiating poker with the markets, is still open to doubt.