Tuesday

26th Jan 2021

Merkel: Eurozone crisis not over yet

  • "We cannot say today that it is over, we still find ourselves in one of the various phases of the crisis," says Merkel. (Photo: consilium.europa.eu)

German Chancellor Angela Merkel on Wednesday (21 March) said the eurozone crisis is "not over" yet, but merely in one of its "various phases," even as investor confidence seems to be returning to troubled euro-countries.

"Concerning the development of the crisis, we cannot say today that it is over, we still find ourselves in one of the various phases of the crisis," she told a meeting organised by her Christian Democrat parliamentary group.

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The German economy was "not on a bad path," she said, adding that Europe is at an "absolutely decisive point."

"How are the conditions and how much hope can investors in Europe, in America, in Japan who put their money in these [eurozone] countries have of seeing their money again?" Merkel asked.

Investor confidence seems to be returning to countries like Italy and Spain, who have seen their borrowing costs shrink, while the 'safe-haven' German bund - whose value was boosted in the past years by the lack of trust in southern countries - is slightly depreciating.

On Wednesday the interest rate demanded by markets on the 10-year German bond rose as high as 2.07 percent, an 18 percent increase from last week. Later in the day, it fell back to 1.98 percent.

Meanwhile, Italy’s 10-year bond was trading at 4.9 percent that day, still higher than Germany's rate, but well below the seven-percent hike last November.

However, leading economists warn that market jitters could come back to haunt Italy and Spain if the eurozone fails to boost its so-called firewall - a combination of an existing temporary bail-out fund and a permanent one due to be established in July.

"Everybody sees now that financial markets are attacking weak euro-countries. So we have to set up a mother of all firewalls. The bigger and more impressive it is, the less it is likely we will have to use it," Angel Gurria, head of the Paris-based Organisation for Economic Co-Operation and Development told German daily Handelsblatt. He said a minimum of €1 trillion would be needed to deflect market attacks on Italy and Spain.

But Merkel has so far been reluctant to give in to international pressure to raise the ceiling of the two funds, currently capped at €500 billion, citing the current improved borrowing conditions for Italy and Spain. A decision on boosting the firewall to €750 billion is likely to be taken next weekend in Copenhagen, during an informal meeting of EU finance ministers.

The US is also pushing for an increase in the euro-firewall as a precondition to more help via the International Monetary Fund.

Speaking to Congress on Tuesday, Federal Reserve chief Ben Bernanke said that the "recent reduction in financial stresses in Europe is a welcome development", but warned that the situation "remains difficult" pending a decision on the firewall "to guard against contagion in sovereign debt markets."

US finance minister Timothy Geithner, during the same hearing, also asked for the firewall to be increased and warned that the severe austerity measures implemented in the euro-countries may hamper the recovery.

"If every time economic growth disappoints, governments are forced to cut spending or raise taxes immediately to make up for the impact of weaker growth on deficits, this would risk a self-reinforcing negative spiral of growth-killing austerity," Geithner said.

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