monetary union

Merkel Stresses Limits to Germany’s Ability to Rescue Euro Zone

June 15, 2012 by NewsMaker Leave a Comment

“Germany’s strength is not infinite,” Ms. Merkel told the Bundestag on Thursday. “Germany’s powers, too, are not unlimited. Consequently, our special responsibility as the leading economy in Europe means we must be able to realistically size up our powers, so we can use them for Germany and Europe with full force.”

The most important actor in the European drama, Ms. Merkel said that she would resist any outside attempts to force Germany to consent to what she called “simple” and “counterproductive” quick fixes. Once again, she rejected jointly issued euro bonds or other forms of shared debt, which several leaders, including President François Hollande of France, have called for.

“I know that it is arduous, that it is painful, that it is a drawn-out task,” Ms. Merkel said. “It is a herculean task, but it is unavoidable.”

Behind the scenes, however, Ms. Merkel is pressing allies in Paris, Rome and elsewhere to cede more power to Brussels over their national budgets before Germany would agree to provide further backing for joint efforts to bolster the euro zone. In her speech, Ms. Merkel hinted at this approach by emphasizing her view that the only way for Europe to recover fully from the crisis is to strengthen political and fiscal unity to support its monetary union.

But that is a long-term strategy. And given Ms. Merkel’s firm stance, coupled with Germany’s longstanding reluctance to make more aggressive moves to shore up the euro, Europe faces a more immediate question: If the Continent’s largest economy cannot or will not stop the euro zone from falling apart, who will?

“Merkel still thinks it’s all about introducing new rules, making countries stick by the rules, and if they stick by the rules the situation will stabilize,” said Philip Whyte, a senior research fellow at the Center for European Reform in London. “She seems to think that she has a lot more time than the markets seem to think.”

Ms. Merkel delivered her pessimistic message as she prepared to fly to Mexico for a two-day summit meeting beginning on Monday, right after a critical vote in Greece on Sunday that could determine whether the country remains in the euro zone. Investors, meanwhile, briefly pushed Spanish bond yields over the key threshold of 7 percent on Thursday, a level that had previously prompted international bailouts for Greece and two other members of the 17-nation euro zone.

With larger economies like Spain and Italy teetering, Ms. Merkel’s stern warning was not just posturing for a domestic audience opposed to bailouts, or tactical positioning before a summit meeting. Her statements reflected a growing fear in Germany that too many guarantees and payouts could threaten its own top credit rating.

That, in turn, would undermine the euro zone’s rescue efforts, which are predicated on Germany’s low borrowing costs and high standing in the markets. Indeed, German bond yields, which have been at historically low levels as investors have sought havens, have begun to creep upward in recent days.

At the Group of 20 meeting next week in Los Cabos, Mexico, the pressure for Ms. Merkel to find a way to contain financial instability and encourage growth is likely to be fierce. But far from turning toward stimulus or agreeing to some form of jointly issued debt, Ms. Merkel’s advisers say that she will remind fellow leaders of their pledges to cut budget deficits in half by next year, as Germany has done.

Ms. Merkel has found herself in a difficult political balancing act. Anger in Germany over the rising price tag for bailouts continues to grow, with more than two-thirds of those surveyed in a recent poll saying that they wanted Greece to leave the euro. But business leaders in this export-driven economy are pressing her to salvage the currency that has served them so well.

Nicholas Kulish reported from Berlin, and Paul Geitner from Brussels. Melissa Eddy contributed reporting from Berlin, and David Jolly from Paris.

Article source: http://www.nytimes.com/2012/06/15/world/europe/merkel-says-germanys-ability-to-rescue-euro-zone-is-limited.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: aggressive moves, monetary union, term strategy

Downgrade of Debt Ratings Underscores Europe’s Woes

January 14, 2012 by NewsMaker Leave a Comment

Another memory jog came Friday from Greece, the original source of Europe’s debt troubles. Talks hit a snag between the new Greek government and the banks and other private investors that Athens hopes will agree to take losses on their debt so that Greece can avoid a default.

Together, those developments underscore that even as Europe’s debt turmoil enters its third year, no clear solutions are yet in sight — despite recent signs that a new lending program by the European Central Bank might be easing financial market pressures.

S. P. warned in December that it might downgrade many of the 17 nations that share the euro, largely because it said European politicians were moving too slowly to strengthen the monetary union and because the euro zone’s problems were propelling Europe toward its second recession in three years.

European politicians, in turn, criticized S. P.’s downgrade plans as providing no meaningful new information to investors but simply stoking a sense of crisis.

To some extent, the prospect of rating downgrades has already been priced into recent bond auctions by Italy, Spain and other countries. Italy, in fact, completed another fairly successful bond auction on Friday, even as rumors of the downgrades had begun to swirl.

But the downgrades may now add to the borrowing costs of the nations affected. Some commercial banks that are required to hold only the highest-rated government securities will have to replace French bonds with other assets, like bonds of Germany.

And the downgrades cannot help but add to the gloom pervading Europe’s economic climate.

“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone,” S.. P said.

Finance Minister François Baroin of France said Friday that the loss of his country’s pristine AAA rating, cut a notch to AA+, was “not good news” but was “not a catastrophe.” He insisted that the country was headed in the right direction and that no ratings agency would dictate the policies of France, which has Europe’s second-biggest economy, behind Germany’s.

But the downgrades pose fresh challenges for Europe’s political leaders, particularly President Nicolas Sarkozy of France, who is expected to run for re-election this spring and had long cited his country’s AAA credit rating as a badge of honor.

In August, when S. P. cut the United States a notch from its top-rank AAA rating, markets briefly plunged. But bond investors have continued to flock to the debt of the United States, which as the world’s largest economy has retained the perception of a financial safe haven. That has kept the United States government’s interest rates at very low levels. But none of the countries downgraded on Friday can necessarily count on such a reaction.

After Friday, the only euro zone nations retaining their top AAA ratings are Germany, the Netherlands, Finland and Luxembourg.

Italy and Spain, which are considered the two big euro-zone economies most vulnerable to an escalation of debt problems, both were downgraded two notches, Italy to BBB+ and Spain to A.

“It will make it harder to erect firewalls around struggling euro zone economies and convince investors that things are more sustainable,” said Simon Tilford, the chief economist for the Center for European Reform in London.

Stocks were down broadly if not deeply in Europe and the United States on Friday, as rumors of the downgrades preceded S. P.’s announcement, which came after the close of trading on Wall Street. And the euro fell to a 16-month low against the dollar.

Just as significant as the ratings downgrades may be the suspension on Friday of the creditor talks in Greece — whose debt S. P. long ago gave junk status.

In October, the European Union pledged to write off 100 billion euros ($127.8 billion) of Greece’s debt if bondholders would agree to voluntarily accept 50 percent losses on their Greek holdings. Such an arrangement, known as private-sector involvement, or P.S.I., has been pushed by Chancellor Angela Merkel of Germany as a way of forcing banks, not only European taxpayers, to foot the bill for bailing out Greece.

But talks broke down on Friday between Greece and the commercial banks.

David Jolly and Steven Erlanger contributed reporting from Paris, Landon Thomas Jr. from London and Gaia Pianigiani from Rome.

Article source: http://feeds.nytimes.com/click.phdo?i=2480446208534edf2ea916a9b7be90a3

Filed Under: Business News Tagged With: clear solutions, downgrades, monetary union

German Leader Reaffirms Backing for Greece

September 27, 2011 by NewsMaker Leave a Comment

In a speech to the same group of German business leaders, Chancellor Angela Merkel said Germany would provide all the help it could to stabilize Greece.

“We must stop blaming each other for our different weaknesses and unite together with our different strengths,” Prime Minister George Papandreou of Greece said in his speech. “The euro zone must now take bold steps towards fiscal integration to stabilize the monetary union. Let’s not allow those who are betting against the euro to succeed.”

The speeches — and a meeting between the two leaders set for Tuesday evening — come just two days before German lawmakers are to vote on a bill that would bolster the main European bailout fund, known as the European Financial Stability Facility. Although it is sure to pass — with opposition support if required — some members of Mrs. Merkel’s governing coalition are threatening to oppose it amid popular anger about bailing out Athens. That would be another blow to her credibility at home.

Mrs. Merkel urged lawmakers to back the bill “in a spirit of friendship, a spirit of partnership, not in a spirit of imposing something.”

“If Europe isn’t doing well, then over the medium term Germany won’t do well,” she said.

In Athens, lawmakers were preparing to vote late Tuesday on a property tax that is seen as crucial to the government receiving more financial aid from its partners and averting a default as soon as mid-October, by which time its coffers will run dry without new funds.

Despite vehement popular opposition, it appeared likely that the governing Socialist party’s slim majority of four in the country’s 300-seat Parliament would carry the bill into law.

Meanwhile, the Greek Finance Minister Evangelos Venizelos said that auditors from the European Union and the International Monetary Fund are due to return to Athens this week.

At a news conference in Athens, he reiterated that the government would do “everything necessary” to meet deficit reduction targets, and said that a deeper-than-expected recession had necessitated “increasingly tough measures.”

He confirmed that the I.M.F.’s chief, Christine Lagarde, whom he met in Washington over the weekend, had requested written guarantees from the government regarding the timetable and projected revenue of the new measures. Those are primarily additional wage and pension cuts and the new tax on property.

But he denied speculation that he had discussed a possible Greek default with Mrs. Lagarde and the European Central Bank’s president, Jean-Claude Trichet.

European governments are said to be drawing up fresh plans to make the E.F.S.F. even larger and more potent, with sweeping powers to recapitalize the region’s struggling banks, possibly in combination with large write-downs for holders of Greek bonds.

In Tokyo, the Japanese finance minister, Jun Azumi, suggested that his government might contribute toward a bailout effort for Greece if European leaders were able to hammer out a reasonable plan to calm market fears.

Laurence Boone, an economist at Bank of America Merrill Lynch, said in a research note that in light of meetings held over the weekend at the I.M.F. in Washington, announcements on bank recapitalization are likely in early October, possibly through the upgraded E.F.S.F., as well as an explanation on how the firepower of the E.F.S.F. might be improved. In addition, she added, the European Central Bank might cut interest rates in October.

Mr. Papandreou appeared to back the plans to bolster the E.F.S.F.

“Shoring up our institutions so they can withstand financial shocks is an essential investment in Europe’s long-term security,” he said.

But he called on his partners to stop sniping at the Greeks, describing the “persistent criticisms” as “deeply frustrating.”

“Frustrating not only at the political level, where a superhuman effort is being made to meet stringent targets in a deepening recession,” he said. “But frustrating also for the Greeks who are making these painful sacrifices and difficult changes.”

“We all need to stop the cacophony and work more in harmony,” he added. “Even Germany depends on Europe, its biggest trading partner, for growth and jobs.”

Greece unveiled new measures last week aimed at raising €7 billion, or $9.4 billion, by the end of the year. They included an average reduction of 20 percent to the salaries of state employees, in addition to 15 percent reductions over the past year, and cuts of 4 percent to pensions, on top of the 10 percent already applied.

Those come just three months after the government passed a previous package that included tax increases and wage freezes.

In the streets of Athens on Tuesday, public opposition to more austerity was clear, as thousands of public transport workers walked off the job in the latest in a series of 24-hour strikes.

Tax officials are also striking to protest wage cuts and feared layoffs in the public sector, while the main civil servants’ union has said it will join two general strikes scheduled for Oct. 5 and 19.

In Japan, Mr. Azumi said that he would “not rule out the possibility that Japan would bear some of the burden” in a bailout, provided there was a plan “that involves a steady process and a reasonable amount of funds that would bring markets a sense of security over the Greek bailout.” He did not comment on how big a possible Japanese contribution might be.

Japan is eager to quell investor jitters especially in currency markets, where the euro has slid against the yen, a headache for Japan’s export-led economy. Japanese stock markets have also taken a beating, recently hitting their lowest levels in two and a half years.

Japan, the world’s third-largest economy after the United States and China, has also been eager to lift its standing in global economic affairs, after top Chinese officials also expressed willingness to help European economies tackle their debt.

The Japanese government has already used euro assets in its vast foreign-exchange reserves to buy bonds issued by the European Financial Stability Facility in a bid to bail out Ireland.

Niki Kitsantonis reported from Athens, Hiroko Tabuchi in Tokyo contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=520658342b7120bc91b8459822fe5143

Filed Under: Business News Tagged With: german business, german leader, monetary union

News Analysis: Europe Ponders Changes to Finance Ministers Group

September 15, 2011 by NewsMaker Leave a Comment

More than 18 months after Europe’s monetary union first toppled into trouble, officials are debating whether more streamlined decision-making — and better presentation — could help their epic battle with the financial markets.

France and Germany agreed last month that the leaders of the 17 European Union countries in the euro zone should meet as a group at least twice a year under the chairmanship of Herman Van Rompuy, the president of the European Council. He now runs summit meetings of the full 27-member European Union.

That has prompted speculation that Mr. Van Rompuy might also lead the monthly meetings of the Eurogroup, made up of euro zone finance ministers. That is a job held since 2005 by Jean-Claude Juncker, the longtime prime minister of Luxembourg.

In part, the debate, which may reach its peak next month when the European Union leaders discuss proposals to strengthen the euro, reflects grumbling over the performance of Mr. Juncker. His influence has waned as his relations with the two main power brokers, Germany and France, have become more and more strained.

On top of some perceived public relations blunders, he also did not help his position when he began advocating jointly issued euro bonds last year — knowing full well that Berlin was staunchly opposed.

“It was always clear that his ability to do the job would suffer substantially if and when lines of communication with Berlin and Paris broke down,” said Thomas Klau of the European Council of Foreign Relations and author of a book on the creation of the euro. “His advocacy of euro bonds damaged his relationship with Berlin and Paris and impaired his ability to function.”

In an e-mailed response, Mr. Juncker’s spokesman, Guy Schuller, said Mr. Juncker intended to complete his mandate, which ends in June.

“Not one single head of state or government or finance minister has ever publicly, or in the presence of Prime Minister Juncker, criticized his leadership of the Eurogroup,” he added.

The European debt crisis has strained all the euro zone’s ramshackle structures and drawn attention to the need for deeper economic integration, something well beyond the ability of any single person to resolve.

The chain-smoking Mr. Juncker was once one of the most influential figures in the bloc. Though the country he has led since 1995 is tiny, Mr. Juncker, who speaks fluent French and German as well as English, specialized in playing the go-between and deal maker.

As head of the Eurogroup of finance ministers, Mr. Juncker vied with the president of the European Central Bank for the informal title of Mr. Euro. But under his leadership, the Eurogroup has failed to emerge as a body able to broker big deals during the latest crisis, often having to refer difficult decisions to national leaders.

During one meeting this year, Mr. Juncker canceled the customary news conference afterward, only to give ad hoc interviews in different languages as he left the building. Officials of the International Monetary Fund, who attended the meeting, said privately that they were shocked by the chaotic presentation.

According to a senior official, who spoke on the condition of anonymity, Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France have pulled back from the idea of trying to oust Mr. Juncker before the end of his term. “They decided the downside of doing that exceeded the upside,” he said. “No one is going after Juncker.”

One complication is that, under part of the European Union’s governing treaty, the finance ministers themselves “shall elect” their own president, so imposing a candidate from outside would be difficult.

An emerging proposal, however, would make the Eurogroup chief accountable to Mr. Van Rompuy. Under this plan, the agenda of euro zone finance ministers would be discussed with Mr. Van Rompuy before meetings, as would any decision to call an emergency meeting of finance ministers.

That arm’s-length approach would probably suit Mr. Van Rompuy, whose position was instituted less than two years ago, since he is supposed to operate at the level of government leaders, not finance ministers.

Mr. Schuller said that Mr. Juncker favored the selection of “a full-time president for the Eurogroup” after his term expires, someone who would have that “as his or her only job.” Ideas being discussed include tapping “a former finance minister or even an outstanding expert,” he added.

Some within the European Commission are pressing for the economic and monetary affairs commissioner, Olli Rehn, to get the job, but that idea is likely to be resisted by Germany and France, who want to retain as much control as possible.

It would also blur the lines of the structure in which the European Commission is supposed to be policing the finance ministers, ensuring that countries meet their economic objectives.

All this means that the most likely solution is one that ties the head of the euro zone finance ministers group more clearly into a new line of command with Mr. Van Rompuy at the head.

While Mr. Klau said he believed that more streamlined structures made sense, he warned that they were only a small element of any long-term solution for the euro.

“Tinkering with the chairmanship is no alternative to devising a form of governance that operates on politically integrated or federal grounds,” he said.

Article source: http://feeds.nytimes.com/click.phdo?i=bba28827ff2baad4c78c1d39c5ba1f19

Filed Under: Business News Tagged With: european union leaders, monetary union, power brokers

News Analysis: Europe May Be Looking for a New ‘Mr. Euro’

September 14, 2011 by NewsMaker Leave a Comment

BRUSSELS — Is Europe about to get a new Mr. Euro?

France and Germany agreed last month that the leaders of the 17 countries of the euro zone should meet as a group at least twice a year under the chairmanship of Herman Van Rompuy, the president of the European Council. He currently runs summit meetings of the full 27-member European Union.

That has prompted speculation that Mr. Van Rompuy might also lead the monthly meetings of the Eurogroup, made up of euro zone finance ministers, a job held since 2005 by Jean-Claude Juncker, the long-serving prime minister of Luxembourg.

In part, the debate, which may come to a head next month when E.U. leaders discuss proposals to strengthen the euro, reflects grumbling over the performance of Mr. Juncker, whose influence has waned as his relations with the two main power brokers, Berlin and Paris, have become more and more strained.

On top of some perceived public-relations blunders, he also did not help his position when he began advocating jointly issued euro bonds last year — knowing full well that Berlin was staunchly opposed.

In an e-mailed response, Mr. Juncker’s spokesman, Guy Schuller, said Mr. Juncker intended to complete his mandate, which ends next June.

“Not one single head of state or government or finance minister has ever publicly, or in the presence of Prime Minister Juncker, criticized his leadership of the Eurogroup,” he added.

To be sure, the crisis has strained all the euro zone’s ramshackle structures and drawn attention to the need for deeper economic integration, something well beyond the ability of any single person to resolve.

One of the veterans of the E.U. scene, the chain-smoking Mr. Juncker was once one of the most influential figures in the bloc. Though the country he has led since 1995 is tiny, Mr. Juncker, who speaks fluent French and German as well as English, specialized in playing the go-between and deal maker.

As head of the Eurogroup of finance ministers, Mr. Juncker vied with the president of the European Central Bank for the informal title of Mr. Euro.

But under his leadership, the Eurogroup has failed to emerge as a body able to broker big deals during the latest crisis, often having to refer difficult decisions to national leaders.

“He has contributed to the crisis,” said one European diplomat not authorized to speak publicly, “but I don’t think it’s correct to say that, were there a more disciplined Eurogroup chairman, the crisis would not have happened.”

According to another senior official, also speaking on condition of anonymity because of the sensitivity of the issue, Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France have pulled back from the idea of trying to oust Mr. Juncker before the end of his term. “They decided the downside of doing that exceeded the upside,” he said. “No one is going after Juncker.”

One complication is that, under a protocol to the E.U.’s governing treaty, the finance ministers themselves “shall elect” their own president, so imposing a candidate from outside would be difficult.

That arms-length approach would probably suit Mr. Van Rompuy, whose position was instituted less than two years ago, since he is supposed to operate at the level of government leaders, not finance ministers.

It would also blur the lines of the structure in which the European Commission is supposed to be policing the finance ministers, ensuring that countries meet their economic objectives.

All this means that the most likely solution is one that ties the head of the euro zone finance ministers group more clearly into a new line of command with Mr. Van Rompuy at the head.

While Mr. Klau said he believed that more streamlined structures made sense, he warned that they are only a small element of any long-term solution for the euro.

“Tinkering with the chairmanship is no alternative to devising a form of governance that operates on politically integrated or federal grounds,” he said.

Article source: http://www.nytimes.com/2011/09/15/business/global/europe-may-be-looking-for-a-new-mr-euro.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: chairmanship, financial markets, monetary union

Merkel Underscores Opposition to Euro Bonds

August 21, 2011 by NewsMaker Leave a Comment

FRANKFURT — Chancellor Angela Merkel of Germany on Sunday re-emphasized her opposition to issuing bonds backed by all the euro zone countries, a position that will be greeted enthusiastically by many of her fellow citizens but could unsettle investors at the beginning of what could be another difficult week in global financial markets.

Mrs. Merkel told ZDF television in an interview broadcast Sunday that the so-called euro bonds would be an option only in the distant future.

“It will not be possible to solve the current crisis with euro bonds,” she said. She added that “politicians can’t and won’t simply run after the markets.”

“The markets want to force us to do certain things,” she added. “That we won’t do. Politicians have to make sure that we’re unassailable, that we can make policy for the people.”

The German finance minister, Wolfgang Schäuble, echoed Mrs. Merkel’s comments, saying that common debt would make it easier for governments to avoid pursuing responsible fiscal policies. In any case, he told the newspaper Welt am Sonntag, it would take too long for countries in the euro zone to amend the treaty on monetary union, which would probably be required to allow the issuance of such bonds.

“We have to solve the crisis within the existing treaty,” Mr. Schäuble said.

The statements by the German leaders are in tune with public opinion in Germany as well as in other countries, like the Netherlands. The Dutch finance minister, Jan Kees de Jager, told the magazine Der Spiegel in an interview published Sunday that Mrs. Merkel should remain firm in her opposition to euro bonds.

That is not what investors want to hear, however.

Stocks around the world plunged last week amid widespread concern that political leaders were unwilling to take bold steps to address the European sovereign debt crisis, at the same time that indicators were pointing to sharply slower growth in Europe and the United States. The benchmark Stoxx Europe 600 index dropped 6 percent last week, with banks suffering some of the biggest drops.

Any further drop in investor confidence could also put pressure on the European Central Bank, which has been intervening in bond markets to hold down yields on Italian and Spanish debt and keep borrowing costs for those countries from reaching dangerous levels.

So far the central bank’s bond market intervention, which began two weeks ago, has kept Italian and Spanish yields below 5 percent, Frank Engels, an analyst at Barclays Capital in Frankfurt, wrote in a note. In October, the European Financial Stability Facility, the bailout fund, will be able to buy government bonds. But that may not be enough to keep yields within bounds, he said.

Mr. Schäuble told Die Welt that he did not think it would be necessary to increase the size of the bailout fund. Such comments may come as a particular disappointment to investors because Mr. Schäuble is regarded as one of the most pro-European members of the German cabinet, and among the most willing to agree to national sacrifice in the interest of saving the common currency.

But Mr. de Jager, the Dutch finance minister, said he would be willing to increase the size of the bailout fund.

Since the beginning of the debt crisis, Mrs. Merkel has resisted being swayed by bond investors; she waited until pressure became intense before agreeing to aid for Greece and other measures that were unpopular with German voters.

She also said she saw “nothing that points to a recession in Germany.” She acknowledged that political leaders needed to regain the confidence of financial markets but said the best way to do that would be to reduce debt.

Mrs. Merkel expressed opposition to euro bonds after a meeting in Paris last week with the French president, Nicolas Sarkozy, during which they pledged to improve economic coordination among euro members.

In the interview with Die Welt, Mr. Schäuble said he personally would be willing to cede some control over fiscal policy to a European finance minister, as Jean-Claude Trichet, the president of the European Central Bank, has proposed. But Mr. Schäuble added, “We can only go as fast and as far as we can convince citizens and their representatives in Parliament.”

Separately, Der Spiegel reported that the German Finance Ministry had calculated that euro bonds would cost Germany an additional 2.5 billion euros, or $3.6 billion, in interest payments in the first year of issuance, and as much as 10 times that sum each year after a decade. Germany’s borrowing costs are typically among the lowest in the world, but could rise if the nation’s reputation for fiscal prudence was diluted by closer association with countries like Italy.

A Finance Ministry spokesman said he could not confirm the Spiegel report, which the magazine said was based on estimates by unidentified ministry experts.

Opposition to euro bonds is strong within German political circles and among the country’s conservative economics establishment because of the perception that the country would wind up subsidizing its neighbors.

But some economists argue that euro bonds would be cheaper even for Germany, because the volume of the bond market would rival that of United States Treasury securities and promote the euro as a reserve currency. That would increase demand for the bonds and lower interest rates.

There is some support for euro bonds in Germany. Leaders of the opposition Social Democrats and Green Party have spoken in favor of common European debt. In addition, the Frankfurter Allgemeine newspaper quoted several members of Mrs. Merkel’s governing coalition in Parliament on Sunday as saying that Germany should not rule out euro bonds forever.

While rejecting the bonds, Mr. Schäuble said that Germany would defend the euro “under all circumstances” and that the government categorically rejected suggestions that Greece should leave the euro zone, as some economists have proposed.

If Greece dropped out, he said, Europe would suffer “a dramatic loss of trust and influence.”

Article source: http://feeds.nytimes.com/click.phdo?i=5a6f40b92868580b7123febd7b1f26a6

Filed Under: Business News Tagged With: angela merkel, euro zone, monetary union

German Leaders Reiterate Opposition to Euro Bonds

August 21, 2011 by NewsMaker Leave a Comment

FRANKFURT — German leaders on Sunday reiterated their opposition to issuing bonds backed by all euro zone countries, with Chancellor Angela Merkel saying that so-called euro bonds would be an option only in the distant future, while her finance minister said that common debt would make it easier for governments to avoid pursuing responsible fiscal policies.

“It will not be possible to solve the current crisis with euro bonds,” Mrs. Merkel told ZDF television.

The German finance minister, Wolfgang Schäuble, said it would take too long for countries in the euro zone to amend the treaty on monetary union, which would probably be required to allow the bonds. “We have to solve the crisis within the existing treaty,” he told the newspaper Welt am Sonntag.

Mr. Schäuble also spoke out against euro bonds during an appearance Sunday in Berlin, Reuters reported, saying that the threat of higher interest rates was necessary to impose budgetary discipline on the nations using the euro currency.

With nervous financial markets likely to face another turbulent week, the comments by Mrs. Merkel and Mr. Schäuble could reinforce perceptions that European leaders remain reluctant to act more forcefully to address the sovereign debt crisis. If so, the European Central Bank could find it more difficult to hold down yields on Italian and Spanish debt, and keep borrowing costs for those countries from reaching dangerous levels.

France and Germany have made it clear that they do not see euro bonds as the solution to rising borrowing costs for countries like Spain and Italy, Frank Engels, an analyst at Barclays Capital in Frankfurt, said in a note.

So far the central bank’s bond market intervention, which began two weeks ago, has kept Italian and Spanish yields below 5 percent, Mr. Engels wrote. In October, the European Financial Stability Facility, the European Union’s bailout fund, will be able to buy government bonds. But that may not be enough to keep yields within bounds, he said.

“Are these backstop facilities sustainable? We have our doubts, as the E.C.B.’s stamina is probably limited and the E.F.S.F.’s balance sheet is capped,” Mr. Engels wrote.

He said that he personally would be willing to cede some control over fiscal policy to a European finance minister, as Jean-Claude Trichet, the president of the European Central Bank, has proposed. But Mr. Schäuble added, “We can only go as fast and as far as we can convince citizens and their representatives in Parliament.”

Separately, Der Spiegel magazine reported that the German finance ministry had calculated that euro bonds would cost Germany an additional 2.5 billion euros or $3.6 billion in interest payments in the first year of issuance, and as much as 10 times that sum each year after a decade. Germany’s borrowing costs are typically among the lowest in the world, but could rise if the nation’s reputation for fiscal prudence was diluted by closer association with countries like Italy.

A finance ministry spokesman said he could not confirm the Spiegel report, which the magazine said was based on estimates by unidentified ministry experts.

However, some economists argue that euro bonds would be cheaper even for Germany, because the volume of the bond market would rival the market for United States Treasuries and promote the euro as a reserve currency. That would increase demand for the bonds and lower interest rates.

There is some support for euro bonds in Germany. Leaders of the opposition Social Democrats and Green Party have spoken in favor of common European debt. In addition, the Frankfurt Allgemeine newspaper on Sunday quoted several members of Mrs. Merkel’s governing coalition in Parliament as saying that Germany should not rule out euro bonds forever.

If Greece dropped out, he said, Europe would suffer “a dramatic loss of trust and influence.”

Article source: http://www.nytimes.com/2011/08/22/business/german-leaders-reiterate-opposition-to-euro-bonds.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: financial stability, fiscal policies, monetary union

Italy Faces a Long List of Barriers to Growth

July 28, 2011 by NewsMaker Leave a Comment

But things got tangled — as they often do in Italy, where bureaucracy and politics can easily overwhelm economics.

Each application that Ikea filed seemed to require yet another. Each mandatory impact study begat the next. By May, when a local mayor had still not decided whether the company could get a building permit, Ikea put out word it would abandon the plan.

As Italy teeters on the edge of the European debt crisis, it can ill afford more debacles like that one. Otherwise, despite having the world’s seventh-largest economy, Italy may have little hope of outgrowing the staggering debt load that could threaten its financial future — and that of the euro monetary union.

Already, investors seem skeptical whether Italy and other debt-saddled European countries can right themselves, despite the financial rescue plan for Greece that Europe’s leaders agreed to last week.

On Thursday, Italy’s borrowing costs jumped almost a full percentage point at an auction of 10-year bonds, compared with just one month ago. At 5.77 percent, the interest rate was more than twice what financially buoyant Germany must pay on bonds of the same maturity.

As higher interest rates make it even harder for Italy to reduce its debt, the main recourse would seem to be faster growth.

“This is the only major issue for Italy now — to resume growth,” said Francesco Giavazzi, an economics professor at Bocconi University and a research fellow at the Center for Economic Policy Research in London.

Italy must not only encourage big corporate investments like the Ikea project, experts say, but it must also remove impediments that stifle growth in the thousands of small and medium-size companies that make up the backbone of its economy.

One small-businessman, Mauro Pelatti, says he has given up on expanding his business in Florence, an hour east of here. “Bureaucracy is so strong, and taxes are so high, that it’s virtually impossible,” said Mr. Pelatti, whose privately held company, Omap, makes parts for steel-stamping machines used on products like Vespa scooters.

Italy’s economy experienced paltry growth starting in the late 1990s, when the country’s manufacturing was overtaken by competitors in Asia. Then came the global financial crisis in 2007, which shrank Italy’s economy by more than 6 percent.

Growth has resumed, but the International Monetary Fund predicts “another decade of stagnation,” with Italy’s gross domestic product expanding by only about 1.4 percent annually in the next few years. (The German economy, Europe’s growth leader, grew 3.5 percent in 2010 and grew by 1.5 percent in the first quarter compared with the same period a year ago.)

Hindering growth is Italy’s heaving government debt, which at 119 percent of gross domestic product is second only to Greece’s among euro zone members. Although it has run a budget surplus, minus debt costs, for several years and recently passed a 48 billion deficit-reduction plan, the Italian government now spends 16 percent of that budget on interest payments — a bill that will rise if investors and creditors continue to fear that Italy cannot escape Europe’s debt crisis.

Currently, the amount of Italy’s debt held by foreigners — nearly 800 billon euros — is more than that of Greece, Ireland and Portugal combined. Should Italy stumble, the aftershocks would be more disruptive than anything the euro zone has felt so far in the crisis.

The barriers to growth make for a daunting list. For starters, national leaders like Prime Minister Silvio Berlusconi and even mayors of the smallest towns tend to be caught up in politics that distract them from the economy’s plight. What is more, productivity has been flat for a decade. And corporate taxes are around 31 percent, not counting an array of local taxes assessed to businesses.

Gaia Pianigiani contributed reporting from Rome.

Article source: http://www.nytimes.com/2011/07/29/business/economy/italy-faces-a-long-list-of-barriers-to-growth.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: francesco giavazzi, monetary union, small businessman