GERMAN CHANCELLOR Angela Merkel has conceded that the economic situation of Greece and Italy is “fragile” but has rejected calls from political allies to eject problem states from the euro zone.
Ahead of a meeting in Berlin with European Council president Herman Van Rompuy, the German leader said the political debate over euro zone reforms and bailouts meant the autumn “was not going to be dull”.
Her finance minister Wolfgang Schäuble has suggested euro zone reforms to steady the single currency could proceed toward a two-speed Europe, calling “for key countries to move ahead unilaterally in specific areas”.
However, he counselled against a “sudden leap into fiscal union and joint liability”, saying it would remove “a key incentive for the weaker members [of the euro zone] to forge ahead with much-needed reform”.
“We’re right in the middle of a debate about the euro and its future . . . so we have our hands full,” said Dr Merkel yesterday.
She insisted the solution to euro zone instability lay in closer integration and austerity rather than excluding member states.
“I’m not even considering the possibility because I think we would start a domino effect that would be extremely dangerous for our currency system.”
Mr Van Rompuy echoed the German leader’s remarks ahead of their private dinner yesterday evening, saying excluding Greece would “cause more problems than solutions”.
“The first thing to do is to put in order the affairs of countries that implemented bad policies in the past and face problems today,” said Mr Van Rompuy.
“Financial markets see that there are still problems in the execution of plans in Greece and Italy. Europe must increase pressure on those countries in order for them to implement the plans they put together.”
Speaking in Finland, the European Council president expressed optimism that euro zone leaders could end a standoff over a bilateral collateral deal between Finland and Greece.
Under domestic pressure, the new Finnish government insisted on collateral from Athens before agreeing to contribute to fresh bailouts. Other euro zone leaders had rejected any special deal for Finland which would put them at a disadvantage or increase their exposure in a future Greek aid deal.
“Good progress is being made, and I am confident we will find a solution soon,” said Mr Van Rompuy in Helsinki after meeting prime minister Jyrki Katainen.
“This crisis in the euro zone will strengthen European integration; that is my firm belief,” he said in a speech. “What strikes me at present is that problems are often blown up out of all proportion. Rumours are taken as gospel and then create a new reality.”
Mr Schäuble has insisted the euro zone “gyrations” could be calmed by austerity and reform measures, only later followed by treaty change to allow centralised fiscal policy.
"Whatever role the markets may have played in catalysing the sovereign debt crisis...it is an undisputable fact that excessive state spending has led to unsustainable levels of debt...Piling on more debt now will stunt rather than stimulate growth in the long run," he writes in the Financial Times.
“Governments...need not just to commit to fiscal consolidation and improved competitiveness – they need to start delivering on these now. But strengthening the architecture of the euro zone will need time. It may need profound treaty changes, which will not happen overnight.”
