Firewall divides euro zone as Rehn's talk of unity falls on sceptical ears
THE EURO ZONE siege of Davos continued yesterday, with German and French leaders disagreeing with each other – and EU officials – over whether a bigger firewall is needed to stabilise the single currency.
Amid a third day of divergent views over bailouts, budgetary rules and eurobonds at the World Economic Forum, EU commissioner Olli Rehn told disbelieving delegates there was “quite a strong unity” of views ahead of Monday’s summit in Brussels.
Mr Rehn also delivered an upbeat assessment of debt restructuring talks in Athens, saying a deal with Greek creditor banks was likely in the coming days.
French finance minister François Baroin said he agreed with his German colleague Wolfgang Schäuble on the need to agree rules for firm budgetary discipline, but disagreed with Berlin’s refusal to boost the capacity of the EU bailout “firewall”.
“We consider that the higher the firewall the less it will have to be used, that’s the deterrent effect,” said Mr Baroin. “One of the lessons we can learn from the Greek case is: avoid contagion.”
The German finance minister disagreed, saying: “You can name any figure for a firewall and it will not work if the real problems are not solved.”
Spanish economics minister Luis de Guindos Jurado declined to name his preferred firewall capacity but said that it should be “big enough and flexible enough to avoid using it”.
Cheerfully ignoring the dissent, Mr Rehn said that he was confident that a bailout boost through the International Monetary Fund could be agreed soon.
There was a divergence of views, too, over the principle of pooled debt.
Mr Rehn made the case for eurobonds, noting that euro zone leaders had yet to agree formally on running the permanent European Stability Mechanism (ESM), with a lending capacity of €500 billion, alongside the existing bailout vehicle, the European Financial Stability Facility.
The Finnish commissioner said that the EFSF would have about €250 billion in spare funds after funding a second Greek rescue deal.
He was shot down by the German and French finance ministers.
“Eurobonds are seen as the philosopher’s stone outside the euro zone when the main question is how to fuel growth,” said Mr Baroin. “If we mutualise debt we don’t solve that main problem.”
In a later discussion, European Central Bank president Mario Draghi said the bank’s €489 billion, three-year cheap liquidity injection had avoided a “major credit crunch”.
However, he said that it was too early to say how much would find its way to businesses and how much was being redeposited in Frankfurt.
“Do we know that actually this money is going to finance the real economy? We don’t have evidence of this kind yet,” said Mr Draghi. “There is a lag. We will have to see.”
His predecessor, Jean-Claude Trichet, was equally cautious, telling a separate panel that “nobody would be foolish enough” to say the euro zone was out of danger.
Across the hall, US treasury secretary Timothy Geithner struggled to find nice things to say about Europe’s rescue efforts to date.
“I think the [European] debate about austerity and stimulus is mostly divorced from a much more practical reality,” he said.
“The proponents of stimulus probably exaggerate its power and the people who talk about austerity get the big things wrong.”
Mr Geithner dismissed calls from Mr Rehn for US and British help in boosting the International Monetary Fund. Washington would not make further contributions to the IMF budget as a “substitute” for euro zone reform, said Mr Geithner.
Looking ahead to Monday, Mr Rehn said he was confident the text of an inter-governmental agreement – outside the EU treaties – would be agreed at the summit and soon bedded down in secondary EU legislation, under the remit of Brussels institutions.