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25th Feb 2024

Rehn on eurozone rescue: 'Mission Accomplished'

EU economy chief Olli Rehn has declared the eurozone rescue mission accomplished.

In a speech to the Brookings Institution, a Washington-based conservative think-tank on Thursday (14 April), he said: "While I cannot yet say ‘Mission accomplished', I am increasingly confident that we are entering into the endgame of the crisis management phase."

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  • A 'European Lehman' has been prevented, says Rehn (Photo: aranjuez1404)

He later went on in his address, which was released on Friday, to tell his American audience that the task had indeed been accomplished.

"Preventing a European Lehman has not been a simple task, with 27 fiscal authorities and 11 central banks - we never had the genius of Alexander Hamilton to draw on, like you did, unless you count Jacques Delors for this too - but the task has nevertheless been accomplished."

He admitted that the "turbulence in sovereign debt market is not over yet. But we are quite confident that with the Portuguese programme, we will have contained the problem."

"Spain has decoupled from the other three countries," he said. The bloc's greatest fear is a potential bail-out of the eurozone's fourth biggest economy, a rescue that would come with an estimated price-tag of €420 billion.

He also took on the "many commentators [that] have claimed that our single currency has failed and have predicted a break-up of the eurozone."

"The euro's critics are wrong to claim that [the crisis] will lead to its failure or break-up. The euro will not only survive but is coming out of the crisis stronger than before."

He argued that this was a result of the creation of financial stability mechanisms, the ongoing austerity and structural adjustment across the bloc, the delivery of a system of economic governance for the EU.

"We are already seeing results in terms of economic recovery," he said.

He concluded by repeating the mantra EU leaders have chanted from the very beginning of the area's crisis that the bloc will do "whatever it takes" to save the single currency.

"The euro is not just a technical monetary arrangement, but rather the core political project of the European Union."

However, across town, the assessment of the EU's rescue mission from the International Monetary Fund was not quite so upbeat.

Also speaking in the US capital at the annual spring joint meeting of the IMF and the World Bank, the president of the international lender, Dominique Strauss-Kahn said that the world should not be complacent and that the European response to the crisis is insufficient.

"We are arguing here in the IMF for at least six months that there is a need for a more comprehensive plan on the European side. The piecemeal approach, dealing with interest rates one day and something else another day, is not working well," he said.

He warned that bailed out countries needed to stick to their agreed austerity plans and that European banks still require recapitalisation.

Of the wider global crisis, he said: "The apex of the crisis is behind us, but it would be part of the complacency I am trying to avoid to believe that we are in the post-crisis era."

Ring-fencing Spain

European leaders in the wake of the Portuguese bail-out have all been at pains to point out how Spain has "decoupled" from the rest of the ‘PIGS' economies and that the other three peripheral economies are now "ring-fenced".

And investors appear to agree, with the yield on Spanish bonds moving in the direction of the core-eurozone countries rather than Greece, Portugal and Ireland.

The optimists credit Madrid's efforts to drastically cut public spending and slash the budget deficit to under 10 percent, reform its labour market and to pump capital into its banks. They also note that Spain's government debt is relatively low at 60 percent.

But economists are not unanimous on Spain's prospects.

The pessimists are quick to remind that the country has half the growth rate of Portugal and double its unemployment.

In 2010, Portugal's economy grew 1.2 percent while Spain suffered an anaemic 0.6 percent.

Unemployment in Portugal stands at 11.1 percent while Spanish joblessness is the highest in the developed world, 20.5 percent, with youth unemployment at 43.5 percent, and growing.

Additionally, while the headline government debt figure is low, much public spending is devolved to the 17 regions, where the central government has little control and allegations of off-balance sheet spending refuse to disappear.

Atop this, private sector debt is huge and some also worry that house prices still have far to fall. Such a development would increase the foreclosure rate, which in turn would further knock the balance sheets of the country's cajas, or savings banks. Exacerbating this is the European Central Bank's likely intention to continue to hike interest rates.

The country's banks also have run up around €100 billion in exposure to their bailed-out next-door neighbour.

Last week, the country's central bank chief, Miguel Angel Fernández Ordonez, warned that 2011 could be the worst year yet for Spanish banks.

"2011 will be another year of adjustment, and for the banking sector, it will be one of the worst," he said.

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