Governments urged to implement Greek rescue deal
By Sarah Collins | Tuesday 30 August 2011
Eurozone governments have been urged to put aside their differences and rush through a crucial July deal to shore up the Greek economy and boost the bloc’s rescue fund, as the debt crisis continues apace. Called in front of the European Parliament’s Committee on Economic Affairs (ECON), on 29 August, Economic Affairs Commissioner Olli Rehn expressed “serious concern” with the worsening economic outlook, which has seen growth slow down in the second quarter of the year after a buoyant start.
“I’m seriously concerned about continued financial turbulence spilling over to and potentially harming the recovery of the real economy,” he told MEPs. “That’s now the immediate short-term challenge - implementation, implementation, implementation.”
Eurozone leaders agreed in July to offer Greece a second €109 billion aid package and expand the €440 billion European Financial Stability Facility (EFSF) to allow it to buy ailing states’ bonds in secondary markets, offer cash-strapped governments pre-emptive credit lines and ringfence money for bank recapitalisations, but it can not yet exercise its new powers until all 17 eurozone governments - and in most cases, parliaments - approve the changes. This should happen by the end of September, EU officials say, although Finland has lately thrown a spanner in the works by demanding that any loans it makes to Greece as part of a second bailout be secured with Greek collateral. Technical talks between eurozone finance officials in a special working group on the bailout are still continuing, with Eurogroup head Jean-Claude Juncker predicting an accord could be found by the middle of next month.
MEPs have blasted leaders’ slow progress, telling a packed hearing, on 29 August, that the European Central Bank was the only institution holding the bloc together. The bank has reluctantly stepped in and revived its bond purchasing programme, snapping up an extra €40 billion in eurozone sovereign bonds - including Spanish and Italian debt - as investors flee to safer havens. “Italy and Spain are only able to roll over their debt in the short term due to ECB intervention,” said MEP Kay Swinburne (ECR, UK). “Market participants in bonds are clearly not impressed.”
Polish Finance Minister Jan Rostowski said the ECB had managed to “save Europe” with its August purchases, and had a stark warning for naysayers who suggest abandoning the single currency. “In the North of Europe people don’t realise - even if some of them in their hearts think creating the euro was a mistake - that it’s not something they can walk away from without profound consequences.”
The European Central Bank is desperate to get the bond purchases off its books, with ECB head Jean-Claude Trichet, who was also at the 29 August meeting, insisting the programme “cannot be used to circumvent the fundamental principle of budgetary discipline”. “The fact that markets are dysfunctional is in our opinion the responsibility of governments,” he said. “They are issuing their own securities.”
The ECB now holds €115 billion in eurozone bonds on its books, up from €74 billion in July. MEPs on the whole rallied behind the bank, with German MEP Werner Langen (EPP) saying, “Without the ECB we would have had bigger problems”. However, some, including Belgian deputy Derk Jan Eppink (ECR), criticised the incursion, saying that the bank had effectively made itself a “lender of last resort”. “You are purchasing bonds which are of dubious quality,” he told Trichet.
MEPs were also critical of the bank’s singular focus on inflation, with Socialist MEP Liem Hoang Ngoc (France) and UKIP deputy Marta Andreasen (UK) calling for the bank to lower its key borrowing rate from its current 1.5%. The ECB has raised the rate twice this year from a historic crisis low of 1%. “We’re facing a double dip recession - we could be on the brink of a fall,” said Ngoc. “The ECB could reduce its base rate.”
However, the calls were dismissed by Trichet, who insisted that the rate was “appropriate” and “contributes to the prosperity of the euro area”.
Portuguese Socialist MEP Elisa Ferreira, however, said the ECB needed to go beyond its current mandate given that the EFSF and the future European Stability Mechanism - which will take over when the EFSF expires in mid-2013 - are not up to scratch. “There has been intervention after intervention on a piecemeal basis,” she said. “There is not just a lack of political will but a lack of vision as well.”
Several other deputies also criticised leaders’ handling of the crisis, including a recent agreement between the French president and the German chancellor to cement their economic ties and lead moves for a eurozone “economic government” with Council President Herman Van Rompuy at its helm. At a meeting on 16 August, they also called for a eurozone-wide balanced budget rule and pledged to harmonise their corporate tax rates and come out with a proposal for an EU-wide financial transaction tax.
“The Franco-German cure is worse than the disease,” said Italian deputy Gianni Pittella (S&D). “We need a timely and complete master plan,” said Austrian MEP Othmar Karas (EPP). “Politicians are contributing to the instability.” Most MEPs called for further integration in the eurozone, which was echoed by the Polish finance minister. “We are now fully in favour of the kind of integration we see as absolutely necessary for the eurozone to retain its stability,” he told MEPs. Rehn, meanwhile, said that while there was a need to “provide more institutional clarity in the euro area,” he downplayed the significance of commonly issued bonds, saying they would “have unavoidable implications for fiscal sovereignty, which calls for a substantive debate in euro area member states to see if they would be ready to accept it”.
Meanwhile, Trichet also rebuffed a call by IMF head Christine Lagarde, who said at a finance conference in Jackson Hole, Wyoming, over the weekend that European banks should undergo an “urgent” recapitalisation. “We have for the European banking system as a whole an enormous amount of available collateral, which clearly indicates that there cannot be a liquidity problem for the European banking system as a whole,” Trichet said.
While Rehn admitted that banks had faced recent funding problems - the summer saw a major rout on bank shares, leading to France, Belgium, Germany, Spain and Italy enacting temporary bans on the practice of short-selling - he said revenue raising was expected to improve and that banks had access to central bank liquidity and public support as a last resort should they need it.