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Euro Zone Crisis

The euro zone crisis was triggered in 2009 when Greece's debts, left by its previous government, reached a record 300 billion euros, leaving the southern European economy with debt levels more than four times higher as a proportion of gross domestic product than the official euro zone cap of 60 per cent of GDP. Since the original problems were uncovered, Greece has been bailed out twice, and lenders have also had to rescue Ireland and Portugal. In the latter half of 2012. Cyprus also required a bailout.

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EU TALKS

Euro zone bank supervisor will take time, says Germany

PUBLISHED : Monday, 03 September, 2012, 8:16pm
UPDATED : Monday, 03 September, 2012, 8:25pm
 

Germany’s finance minister hit hopes that Europe’s stressed banks could soon tap the region’s rescue funds directly when he said on Monday that a new Europe-wide banking supervisor is unlikely to be up and running in the new year.

Meanwhile, Chancellor Angela Merkel called on Germans to show “solidarity” with those members of the 17-country bloc that uses the euro which are struggling with much-needed economic reforms.

EU leaders agreed in June funds set up to bail out indebted governments could be allowed to funnel money directly to ailing banks – rather than via governments which would add to their debt burden – once an effective central bank supervision system is established.

The idea is to assuage worries about the health of Europe’s banking system, which is in danger of grinding to a halt as banks become increasingly wary of lending to one another.

The European Commission will make proposals for a new supervisory system on September 12. Internal market commissioner Michel Barnier said last week he hopes it could be phased in starting next January and be extended to all banks in the euro zone at the beginning of 2014.

Barnier also voiced hopes that banks could be helped directly from the US$629 billion) European Stability Mechanism, Europe’s planned permanent bailout fund, starting in January.

However, German Finance Minister Wolfgang Schaeuble was sceptical about whether the new system would start work next year.

“I think that’s pretty unrealistic,” he said on Deutschlandfunk radio.

“I have my doubts that it will come so quickly, and so I think that once again expectations are being created here that can’t be fulfilled, not even close,” Schaeuble said. “That is always a reason for trouble and nervousness in the financial markets.”

Berlin and Brussels already appear at odds on the extent of the new supervisor’s powers.

Barnier has argued that all banks need to be supervised centrally by the European Central Bank; Germany argues that the supervisor should limit its focus to major banks whose stability is vital to Europe’s financial security.

Germany insists that, if the supervisory job is handed to the ECB, decision-making on banking supervision and monetary policy must be strictly separated.

Chancellor Angela Merkel and her government have insisted that the key to resolving the euro zone’s debt crisis is for struggling countries to cut their budget deficits and pursue structural reforms such as liberalising labour markets.

Berlin says aid can only be granted under those conditions – a point Merkel underlined in a speech on Monday to supporters in a Bavarian beer tent, while also pleading for sympathy with countries undergoing painful changes.

“We want a stability union in Europe, and the end of a debt union,” she said. “Germany must set a good example and we must also – even if it is sometimes said that we are hard – push for reforms in these countries.”

“We have to say, you must make changes – we know from Germany that that’s the only way things get better ... but I also say that, in such a difficult phase, these countries deserve our solidarity, that we want them to overcome these difficulties.”

Bailing out strugglers hasn’t been popular in Germany, which is the biggest backer of the rescue efforts.

The ECB is currently working on plans for a bond-buying programme aimed at lowering the borrowing costs of debt-ridden governments including Spain and Italy. ECB President Mario Draghi is expected to detail a new approach after the bank’s governing council meets on Thursday.

Germany’s national central bank, the Bundesbank, and its head, Jens Weidmann, oppose a big escalation in the ECB’s bond-buying strategy. They argue it risks breaching the EU treaty provision barring the ECB from directly backing governments.

Schaeuble stressed that the government respects the independence of the ECB and the Bundesbank. He cautioned against raising “wrong expectations” and expressed confidence that the ECB won’t exceed its mandate.

“There must be no decisions – we would consider them completely wrong, they would not be covered by the mandate of the European Central Bank, but the European Central Bank won’t do that – that would amount to government debt being financed through monetary policy,” he said.

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