Merkel says errant states should be kicked out of eurozone.

Angela Merkel says the eurozone’s current rules are not sufficient.

ANDREW WILLIS

17.03.2010 @ 17:45 CET

EUOBSERVER / BRUSSELS – German Chancellor Angela Merkel has said the eurozone must be able to expel members that repeatedly break the club’s fiscal rules in the future.

In a speech to the German parliament on Wednesday (17 March), the chancellor stressed that such an option would only be used “as a last resort”, but added that the EU’s current Stability and Growth Pact rules are no longer sufficient to deal with the euro area’s difficulties.

“In the future, we need an entry in the [Lisbon] Treaty that would make it possible, as a last resort, to exclude a country from the eurozone if the conditions are not fulfilled again and again over the long term,” Ms Merkel said. “Otherwise co-operation is impossible.”

Market doubts over Greece’s ability to meet refinancing needs in the coming months have plunged the euro area into its greatest crisis in its 11-year history, with the possibility of a sovereign debt default weighing heavily on the euro currency.

With a deficit of 12.7 percent of GDP last year, Athens is grossly in breach of the three-percent limit laid down by stability and growth pact. Other member states have proved little better however, raising the prospect of contagion spreading to other EU countries with weak finances such as Portugal or Spain.

Ms Merkel’s comment’s echo plans outlined by Germany’s finance minister, Wolfgang Schaeuble, earlier this month, under which a European IMF-style monetary fund would be set up to aid struggling eurozone countries, but backed up by much tougher fiscal rules including the possibility of expelling repeat offenders.

With German public opinion strongly against a Greek bail-out, to which Berlin would be a main contributor, a number of analysts have interpreted Mr Schauble’s plans as a means of avoiding such aid transfers in the future by making it easier for eurozone members to leave the single currency.

At least one senior euro area official greeted Ms Merkel’s statements with sympathy on Wednesday. “An alternative view of ‘safeguarding financial stability’ in the eurozone, [a stated desire of EU leaders], is to look for mechanisms that would facilitate an orderly exit of a consistently ‘misbehaving’ member state,” the official told EUobserver.

Greek situation

With the likely need for a treaty change ruling out the quick establishment of such an exit mechanism, Ms Merkel said no member state should be “left on its own” in a crisis.

But she added that: “A quick act of solidarity is definitely not the right answer,” confirming the German line that no aid will be offered to Greece unless absolutely necessary.

That date may arrive at some point over the months of April and May when roughly €20 billion of Greek debt is set to mature. Athens has indicated that the interest rate of 6.3 percent, offered to investors during the country’s last bond issuance, is unsustainable.

On Tuesday, EU finance ministers agreed much of the detail of a mechanism to provide financial aid to Greece, but the political decision to announce the plans has yet to be taken.

A Greek spokesperson said on Wednesday that the country’s centre-left Pasok administration is looking for “clear support” next week from EU leaders at a summit in Brussels, adding that Athens could turn to the IMF if the EU support is not forthcoming.

“I believe the summit is when it will become evident whether the European partners want to support a country … or whether we have to resort to some other solution,” Mr George Petalotis said, report newswires.

Greece has used the threat of turning to the IMF as a means of putting pressure on euro area governments in the past, with EU officials previously indicating their desire to solve eurozone problems internally.

However, reports suggest a number of eurozone countries are softening their stance on potential IMF aid to Greece, with the international organisation already providing technical advice.

“It would be good if the IMF were a part of the package. Finland supports both technical and economic aid [from the IMF]“, Finnish finance minister Jyrki Katainen reportedly said this week.

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EU economic governance inevitable, Belgian PM says

Leterme: “It’s about Europe’s financial stability and it’s not an ideological debate about federalism.”

ANDREW RETTMAN

16.03.2010

EUOBSERVER / BRUSSELS – Belgian Prime Minister Yves Leterme has said that joint economic governance among some or all EU member states is an inevitable consequence of the creation of the euro.

Speaking in an interview with EUobserver about the prospects for setting up a future European Debt Agency (EDA) and a European Monetary Fund (EMF), Mr Leterme predicted that current resistance to the plans will melt away in the coming year.

“You can have doubts about the political will today …but the idea of strengthened economic government has been put on the table and will make progress. In the end, the EDA or something like it will become a reality. I’m convinced of this,” he said.

“It’s about Europe’s financial stability and it’s not an ideological debate about federalism. I myself am a federalist. But more integration and deeper integration are simply logical consequences of having a single currency.”

Mr Leterme floated the debt agency proposal in the press on 5 March.

The agency would be a new EU institution based at the European Investment Bank in Luxembourg. It would help EU governments to borrow money more cheaply by selling bonds guaranteed by all participating states and channeling funds to national treasuries, within a set of limits.

A back-of-the-envelope calculation shows that if markets bought the bonds at an interest rate just 0.1 percent lower than today, the EU as a whole could save €6.6 billion.

The EMF plan was put forward by Germany and involves the creation of a new fund to grant emergency loans to countries at risk of sovereign default.

Both proposals would require EU states to give up fiscal decision-making powers and to co-ordinate national budgets at the EU level to a far greater extent than today. They could also require financially sound EU countries to prop up their insolvent cousins.

The EMF would most likely need a new EU treaty, which forbids eurozone bail-outs as things stand. But the EDA could be set up on the basis of Article 136 of the existing treaty on “the proper functioning of economic and monetary union,” Mr Leterme’s advisors say.

The Belgian leader may raise the debt agency plan at the EU summit on 25 March. It would be “interesting” for EU leaders to discuss it further at the informal, monthly summits proposed by EU Council President Herman Van Rompuy, he said.

The EDA could initially be set up outside EU structures if need be. “We can do a lot of things on an intergovernmental basis, a kind of coalition of the willing, a coalition of the willing of most of the eurozone countries,” Mr Leterme explained.

‘Doubt in their eyes’

The global financial crisis and the more recent Greek debt crisis have caused a shift in EU thinking.

Recalling an extraordinary EU summit in October 2008, which took place a few weeks after the collapse of the US investment bank, Lehman Brothers, the premier said: “We saw the doubt in the eyes of [French and German leaders] Mr Sarkozy and Mrs Merkel. You could feel that they were thinking that sharing the risks, the common approach is not necessary because they were big enough as countries to save their own banking systems.”

But today, he said: “Even Mr Sarkozy and Mrs Merkel realise that if this was to happen again and there was a problem for one of their banks, it would not be easy to avoid a common approach.”

Mr Leterme cautioned that on the one hand, pro-integration countries must strike while the iron is hot: “[The Greek crisis] creates a momentum which we have to seize.”

But on the other hand, the EDA requires a deep technical analysis best made away from the volatile emotions and media glare surrounding the Greek bail-out case. “The problem is that you should not do this at the moment when it is at the core of the public debate. You have to be able to do it in a more theoretical way, a scientific way,” he said.