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28th Jan 2023

Barroso raises alarm about severity of euro crisis

  • Barroso: 'Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro-area periphery' (Photo: consilium.europa.eu)

European Commission President Jose Manuel Barroso has indicated that bond market developments on Italy and Spain threaten the very survival of the euro.

The top official in a letter sent to the Heads of State or Government of the Euro area on Wednesday (3 August) and made public by the commission on Thursday said new bailout measures agreed by the 17 eurozone countries in July "are not having their intended effect on the markets", after the cost of borrowing for Italy and Spain spiraled this week.

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He added: "Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro-area periphery. Euro-area financial stability must be safeguarded."

Barroso blamed in part "the undisciplined communication and the complexity and incompleteness of the 21st July package" for the escalation of the crisis.

But his letter also sent out a mixed message on the new measures.

On one hand, he said governments should quickly ratify the July package and refrain from fiddling with its details by "introducing excessive constraints in terms of either additional conditionality or collateralisation of ... lending."

On the other hand, he said there should be a "rapid reassessment of all elements related to the EFSF, and concomitantly the ESM [the two new bailout mechanisms], in order to ensure that they are equipped with the means for dealing with contagious risk."

A commission spokesowman, Karolina Kottova, said the reassessment could involve increasing the size of €440 billion bailout kitty.

She added that this does not mean extra money is needed to bail out Italy or Spain, whose public debt is counted in the trillions.

"When we speak about all elements we mean all elements and all elements might include the size [of the bailout money] as well," she told press in Brussels on Thursday. "Discussion of magnitude is not related to the situation that some of you have raised about Italy and Spain. It's part of a broad reflection."

Kottova declined to say which EU countries are seeking extra "conditionality" for the bailouts or what type of new conditionality is being talked about.

Barroso's public warning on the crisis is his second in as many days, with the tone of the letter published on Thursday sharper than his press release on Wednesday.

Markets will on Thursday also look to the European Central Bank in Frankfurt to decide if it will resume buying weak eurozone bonds.

"A revival of the ECB's securities markets program is the only real option that would prevent a liquidity crisis for Spain and Italy," Goldman Sachs economist Dirk Schumacher told Agence France Presse ahead of the announcement, due at 2.30pm local time.

Full text of Barroso letter

Brussels, 3rd August 2011

Dear Colleagues,

Developments in the sovereign bond markets of Italy, Spain and other euro area Member States are a cause of deep concern. Though these developments are clearly unwarranted on the basis of economic and budgetary fundamentals and the recent efforts of these Member States, they reflect a growing scepticism among investors about the systemic capacity of the euro area to respond to the evolving crisis. Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis.

The 21st of July bold decisions on the Greek package and the increased flexibility of the EFSF (precautionary use, recapitalisation of banks and intervention in secondary bond markets), are not having their intended effect on the markets. Markets highlight, among other reasons, the global economic uncertainties due to both economic growth and the protracted decision on budgetary adjustments in the US but, first and foremost, the undisciplined communication and the complexity and incompleteness of the 21st July package.

Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro-area periphery. Euro-area financial stability must be safeguarded, with all EU institutions playing their part with the full backing of euro area Member States. We need also to consider how to further improve the effectiveness of both the EFSF and the ESM in order to address the current contagion

Concretely, I would like to call on you to accelerate the approval procedures for the implementation of these decisions so as to make the EFSF enhancements operational very soon. These changes should also avoid introducing excessive constraints in terms of either additional conditionality or collateralisation of EFSF lending. I trust that governments and national Parliaments will rapidly approve these decisions necessary to improve the EFSF flexibility.

I also take the opportunity to urge a rapid reassessment of all elements related to the EFSF, and concomitantly the ESM, in order to ensure that they are equipped with the means for dealing with contagious risk.

Finally the Commission stands ready to contribute to the improvement of working methods and crisis management in the euro area.

Yours faithfully,

Jose Manuel Barroso

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