Thursday

2nd Feb 2023

Germany may bail out troubled eurozone states

  • Ireland's banking sector makes it particularly vulnerable, said Angela Merkel (Photo: EUobserver)

German chancellor Angela Merkel has given the strongest signal to date that her country may come to the rescue of embattled eurozone economies.

"We have shown solidarity and that will remain so. We should use Sunday's summit [in Brussels] for member states affected to give an honest report of their situation," she said on Thursday evening (26 February) at a press conference in Berlin.

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"We will have to discuss the situation in each individual country. It all depends on whether we are able to speak openly and honestly about the situation because there are a lot of rumours flying around."

Certain conditions are likely to be attached to any support plan offered by Berlin.

While Ms Merkel refused to be drawn on the exact nature of financial support, she made it clear that action to tackle excessive budget deficits would be a stipulation for receiving aid.

She indicated such action could be carried out under Article 100 of the Maastricht Treaty that allows financial assistance to be given to countries experiencing "difficulties caused by natural disasters or exceptional occurrences beyond its control."

"Of course there is a certain interpretative room to manoeuvre in the stability and growth pact and a country like Ireland that has been hit quite hard by the banking crisis is clearly in a different situation to a country like Slovakia with fewer banks," said Ms Merkel.

German officials hinted support for Ireland could be dependent on the country increasing its low corporate tax reports the Irish Times, an issue that Germany has complained about in the past.

The fight for funding

Many EU countries have signaled that they will run large budget deficits this year and competition on the money markets to raise capital is already acute.

Germany, seen as the safest EU economy by investors, has twice failed this year to raise all the capital it was seeking when auctioning 10-year bonds.

Ireland on the other hand was forced to issue three-year bonds this week at nearly 2.5 percentage points over equivalent German bonds. Before the credit crisis, Irish bonds traded at about the same level as German bonds.

The credit shortage raises the prospect that one or more eurozone countries may be forced to default on current debt repayments and seek help from Germany or the IMF.

"The first will certainly be a small country, so that can be managed by the bigger countries or the IMF," former Bundesbank president Karl Otto Poehl said on Thursday in a further indication of possible German action.

Germany has ruled out the possibility of a common "eurobond" for eurozone members, as it would increase the cost of German borrowing. Likewise, central and eastern non-eurozone states fear such a move would reduce market demand for their bonds.

The tough situation faced by many central and eastern European states is likely to feature heavily on the agenda of Sunday's extraordinary summit of European leaders.

Currencies in the region have fallen heavily this week over fears western European banks are pulling out funds and speculation that the global recession may prompt a sovereign default by one or more states.

Both Hungarian and Polish prime ministers this week pushed for a speedy entrance to the relative safe-haven of the eurozone.

On Thursday, three large development banks announced they will offer €24.5 billion in financing to struggling banks in the region. The move by the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank is aimed to kick-start ailing cash flows in the region.

Latvia's Prime Minister-designate Valdis Dombrovskis, warned on his first day on the job on Thursday that the Baltic state could run out of money by the summer.

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