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11th Aug 2022

Merkel says errant states should be kicked out of eurozone

  • Angela Merkel says the eurozone's current rules are not sufficient (Photo: The Council of the European Union)

German Chancellor Angela Merkel has said the eurozone must be able to expel members that repeatedly break the club's fiscal rules in the future.

In a speech to the German parliament on Wednesday (17 March), the chancellor stressed that such an option would only be used "as a last resort", but added that the EU's current Stability and Growth Pact rules are no longer sufficient to deal with the euro area's difficulties.

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"In the future, we need an entry in the [Lisbon] Treaty that would make it possible, as a last resort, to exclude a country from the eurozone if the conditions are not fulfilled again and again over the long term," Ms Merkel said. "Otherwise co-operation is impossible."

Market doubts over Greece's ability to meet refinancing needs in the coming months have plunged the euro area into its greatest crisis in its 11-year history, with the possibility of a sovereign debt default weighing heavily on the euro currency.

With a deficit of 12.7 percent of GDP last year, Athens is grossly in breach of the three-percent limit laid down by stability and growth pact. Other member states have proved little better however, raising the prospect of contagion spreading to other EU countries with weak finances such as Portugal or Spain.

Ms Merkel's comment's echo plans outlined by Germany's finance minister, Wolfgang Schaeuble, earlier this month, under which a European IMF-style monetary fund would be set up to aid struggling eurozone countries, but backed up by much tougher fiscal rules including the possibility of expelling repeat offenders.

With German public opinion strongly against a Greek bail-out, to which Berlin would be a main contributor, a number of analysts have interpreted Mr Schauble's plans as a means of avoiding such aid transfers in the future by making it easier for eurozone members to leave the single currency.

At least one senior euro area official greeted Ms Merkel's statements with sympathy on Wednesday. "An alternative view of 'safeguarding financial stability' in the eurozone, [a stated desire of EU leaders], is to look for mechanisms that would facilitate an orderly exit of a consistently 'misbehaving' member state," the official told EUobserver.

Greek situation

With the likely need for a treaty change ruling out the quick establishment of such an exit mechanism, Ms Merkel said no member state should be "left on its own" in a crisis.

But she added that: "A quick act of solidarity is definitely not the right answer," confirming the German line that no aid will be offered to Greece unless absolutely necessary.

That date may arrive at some point over the months of April and May when roughly €20 billion of Greek debt is set to mature. Athens has indicated that the interest rate of 6.3 percent, offered to investors during the country's last bond issuance, is unsustainable.

On Tuesday, EU finance ministers agreed much of the detail of a mechanism to provide financial aid to Greece, but the political decision to announce the plans has yet to be taken.

A Greek spokesperson said on Wednesday that the country's centre-left Pasok administration is looking for "clear support" next week from EU leaders at a summit in Brussels, adding that Athens could turn to the IMF if the EU support is not forthcoming.

"I believe the summit is when it will become evident whether the European partners want to support a country ... or whether we have to resort to some other solution," Mr George Petalotis said, report newswires.

Greece has used the threat of turning to the IMF as a means of putting pressure on euro area governments in the past, with EU officials previously indicating their desire to solve eurozone problems internally.

However, reports suggest a number of eurozone countries are softening their stance on potential IMF aid to Greece, with the international organisation already providing technical advice.

"It would be good if the IMF were a part of the package. Finland supports both technical and economic aid [from the IMF]", Finnish finance minister Jyrki Katainen reportedly said this week.

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