Brussels, 07/12/2010 (Agence Europe) - Eurozone finance ministers meeting on Monday 6 December between 5.00pm and 10.00pm at the Eurogroup, decided that at this stage it was not appropriate to take additional measures to mitigate the effects of the financial crisis. They were divided about whether or not to increase rescue funds for countries experiencing difficulty or whether they should create common compulsory loans. Jean-Claude Juncker, the president of the Eurogroup informed the press on Monday evening that “we have no new decision to announce to you”. The situation appears somewhat calmer but the markets are keeping their sights trained on the most fragile countries such as Portugal, Belgium and Spain.
Faced with fears of contagion, finance ministers are envisaging more radical options. One of these options includes the possibility of creating “Eurobonds”, launched in common with several other states in order to shoulder the risks and prevent the most fragile countries coming under attack from speculators. Jean-Claude Juncker and Italian Minister for Finance Giulio Tremonti relaunched this idea on Monday in the pages of the Financial Times. This idea is, however, being contested. Germany, which enjoys the lowest bond rates in Europe and is refusing to pay to the others, has made its opposition to this idea clear. Austrian Finance Minister Josef Pröll said that he has a “very, very critical” opinion with regard to this question, because he considers that it would make financially responsible countries have to pay for countries that have failed to keep a tight ship in this domain. The European Commission also expressed its scepticism. At the end of the Eurogroup meeting, Junker emphasised that the idea of “Eurobonds” “was not really on the agenda”. He did, nevertheless, defend his idea which “is not as stupid as it would appear because it is necessary to see the details of the architecture for such a bonds issue”. He pointed out that in January 2005 he had launched the idea of the “European semester” (during which member states would be subject to examination by the European Commission and their peers would scrutinise their draft budgets, before they were definitively adopted by their respective national parliaments). Jean-Claude Junker explained that “no one took the bait and now it is a success” and predicted that the same would happen with Eurobonds. An attitude shared by Tremonti, who pointed out that the proposal had not gone unnoticed: “This is an idea that has come from afar and will go far”.
The Europeans were also divided about another possible option: more resources from the rescue fund for eurozone countries in difficulty, which was set up last spring and will be used to help Ireland. This European Financial Stability Fund (EFSF) currently contains €440 billion in guaranteed loans to euro zone countries, as part of a larger €750 billion mechanism, with €250 billion in loans from the IMF and €60 billion from the EU.
The president of the European Central Bank (ECB), Jean-Claude Trichet, said that this capacity should be increased if necessary and the International Monetary Fund (IMF) also supports it. Junker explained, however, that finance ministers had decided that “there is no need to take immediate action”. He also said that they had listened attentively to Klaus Regling, the director of the European Financial Stability Fund who had said: “For the moment, there is no reason to increase the volume of the EFSF”. Ministers have different opinions on the impact that this measure would have on the markets. Angela Merkel, the German Chancellor, repeated on Monday that she did not see any reason to immediately discuss any change to the EFSF. Elena Salgado, Spanish Finance Minister, considered that “injecting additional resources into the mechanism is not an appropriate question for the moment”. France is said to have reservations about it too. The subject, however, is expected to be broached again by European heads of state and government during the European Council on 16 - 17 December in Brussels. On Tuesday 7 December, Belgian Minister of Finance Didier Reynders explained that “debates on the volume of the EFSF will continue in the next few weeks”. He added that “we're going to continue to work. Yesterday we did not take a decision. There will, however, be further debates on how to devise a permanent crisis management mechanism and perhaps continued debating on what scale this should take, whether this is a definitive or provisional mechanism”.
Financial stability of the eurozone. Jean-Claude Junker (see other article) asserted that “we have had a detailed discussion on the programme underpinning the financial aid agreed to Ireland”. The Spanish and Portuguese ministers provided a detailed explanation on the measures taken. The president of Eurogroup explained that “we are very impressed by the Spanish budgetary consolidation programme. We have noted that Portugal is currently making very notable progress in budgetary consolidation and we have asked the country to provide us with further explanations about structural reforms it intends to undertake in the next few months”. The decision to extend debt repayment on loans to Greece was postponed until the beginning of next year (as announced on 28 November last).
Olli Rehn noted: “We were able to congratulate Spain for its very comprehensive and substantial reform programme, together with the action it had taken on all the different fronts”. The commissioner mentioned the increased transparency in the banking system, restructuring of the savings bank sector, implementation of new budgetary measures (certain tax increases and privatisation measures) and reforms of the pensions system and labour market. These measures are expected to help Spain “reach its public deficit target of 6% of GDP next year”, explained Rehn.
The Commission congratulated Portugal on its “ambitious” 2011 budget, which has just been adopted. “We hope that this will be followed by a raft of consolidation measures that enable the country to reach its public deficit target of 4.3% in 2011 and that the measures will help improve general stability of the economy in the country”.
Economic governance of the eurozone. On 28 November last (EUROPE 10266), the Eurogroup agreed on the broad guidelines for the crisis management mechanism, known as the European Financial Stabilisation Mechanism or EFSM. As explained on 28 November, Juncker was keen to point out that involvement of the private sector in resolving crises “is not an ex ante and a priori involvement and will be based on a case-by-case approach”. He added that “eurozone governments will do everything to ensure the financial stability of the eurozone and we think that economic governance of the eurozone should be enhanced and that during the course of the work, we will develop secondary level legal amendments in which the sanctions mechanism can be strengthened”. Eurozone ministers also agree on the necessity of going down the path towards “sustainable financial consolidation”.
Junker explained that in the different working groups the examination of the Commission proposals of last September on strengthening economic governance would continue. On this theme, he concluded that “we will see over the next few weeks and months whether there are still differences between us and if small divergences persist, we will as ministers, attempt to smooth them out.”
Olli Rehn, European Commissioner for Economic and Monetary Affairs, said that “prevention is important. It is therefore very important that we have a good discussion at the Council and with the European Parliament on the legislative package for reinforcing economic governance”. He said that he was pleased to see that the Council and the EP are determined to push forward with this package so that “we have new and strict rules by next summer”. Rehn underlined the fact that the world crisis had had a strong impact on Europe “because not everything was in order here. This is why we need an enhanced Stability and Growth Pact in order to avoid unsustainable budgetary positions”. He also said that they needed to extend monitoring of macro-economic imbalances and ensure that there are more efficient implementation measures and “earlier and more automatic sanctions in the event of rules being violated”. The commissioner also said that countries should develop the best budgetary positions possible “in order to respect the objectives decided upon”.
European Financial Stability Facility. The director of the EFSF, Klaus Regling, explained that the loan agreement with Ireland would be signed before Christmas: “We are currently preparing the dossier for the bank selection process involved in the first transactions and we are thinking about issuing €5 billion in Eurobonds in the second half of January”. The major investors (central banks, sovereign wealth funds and investors) appear pleased to have this new “Triple H” investment opportunity, emphasised Regling. The latter explained that on the subject of the agreed loans, “I sometimes hear that the EFSF will sometimes be insufficient when tackling the scale of the challenges. Ireland's needs remain, in fact, relatively low with regard to the EFSF lending capacity. With regard to Ireland, this is much less than a tenth of the total EFSF lending capacity. Therefore, there will be sufficient remaining resources to tackle other demands if necessary”.
Discussion with the IMF. A discussion took place with the president of the International Monetary Fund (IMF), Dominique Strauss-Kahn. He presented his opinions regarding economic development. Jean-Claude Junker declared: “We largely agree about developments in economic growth in Europe. I did not note any notable differences between the analysis of the European Commission and that of the IMF”. He added that “together with the director of the IMF, we concluded that the priority should go back to an intelligent consolidation of public finances so as not to hinder the economic recovery”.
Olli Rehn underlined that they largely accepted the economic balance sheet for the eurozone, developed by the IMF. The commissioner stated that “the recovery is taking place and is being implemented. It is, however, necessary to put out a few fires here and there, so as to prevent them developing into a forest fire”. (L.C./transl.fl)