EU ministers pledge billions in a gamble to save the euro
European leaders were forced today into radical action in an attempt to save the euro, agreeing for the first time to erect a safety net worth tens of billions for member states in distress. They also wrangled over a much more ambitious scheme to issue guarantees from eurozone governments to raise hundreds of billions on the markets.
With the prospects for the single currency drowning in a tidal wave of debt and default fears, and even the future of the European Union being questioned, EU finance ministers established a modest "stabilisation mechanism" for distressed member states, aimed at reassuring the markets opening tomorrow.The plan represented the most fundamental rewriting of the single currency regime since its inception 11 years ago, after months of hesitation over what to do about the debt crisis in Greece.
However, as the governments engaged in a high-risk gamble to shore up the currency, it was unclear whether the moves would be enough to see off market pressure on the eurozone's weaker links.
After a special summit of the 16 eurozone government leaders, which ended early yesterday morning, the European commission and the 27 finance ministers of the EU member states hurriedly constructed the stabilisation fund, invoking last-resort emergency clauses in the Lisbon treaty as the legal base.
Despite the political limbo in Britain, the chancellor of the exchequer, Alistair Darling, travelled to Brussels anxious to forestall any attempt to manoeuvre the UK into footing part of the bill for shoring up the euro.
But he agreed with the other 26 ministers to more than double a European commission-administered fund for balance of payments support from €50bn (£43bn) to €110bn and to make eurozone countries eligible for the support. In the worst-case scenario, Britain would still be liable for €15bn, according to the Treasury.
Under previous rules, the commission is allowed to raise €50bn, using the EU budget as collateral, to help distressed countries outside the single currency. Over the past 18 months, Latvia, Hungary and Romania have drawn on the support. But the mechanism has now been made available to the euro countries.
The much more radical and contested proposal concerned the establishment of an emergency bailout fund, which could run to hundreds of billions, underwritten by loan guarantees from governments of the 16 single-currency states.
Although such a scheme had to be given a green light by the 27 EU governments, the bailout fund would apply only to the 16 countries whose governments would be liable in the case of default.
The Spanish finance minister, Elena Salgado, said: "We are going to defend the euro. We have to give more stability to our currency ... We will do whatever is necessary [to reach agreement]."
While Britain signed up for the balance of payments fund, the bailout provisions supported by loan guarantees appeared to be a red line for Darling. Treasury officials said that Britain would agree to the plan only if there were copper-bottomed pledges that there could be no fiscal implications for the Brown government.
"What we will not do and what we can't do is to provide support for the euro," the chancellor said ahead of the meeting. "That has got to be for those countries that use the euro."
The third, perhaps most far-reaching, element of the blueprint to save the euro concerned the European Central Bank (ECB). The bank is under pressure to assent to a programme of quantitative easing through a massive bond buyback operation on the secondary markets, and perhaps also by agreeing to accept downgraded bonds as collateral for lending, as it agreed to do for Greece last week.
Over the past week, European leaders such as Angela Merkel, chancellor of Germany, President Nicolas Sarkozy of France, and Jean-Claude Juncker, the Luxembourg prime minister and head of the eurogroup, have declared war on the financial markets, deploying martial language to denounce the "speculators" engaged in a global campaign to destroy the euro.
Figures from the Chicago Mercantile Exchange yesterday showed almost $17bn of short positions against the single currency.
The Europeans are also under pressure from the Americans and other world leaders to act decisively to stabilise the euro for fear that a meltdown in Europe will spread to economies globally.
The board of the International Monetary Fund met in Washington today and approved its three-year €30bn support for Greece, as part of the €110bn bailout package.
The Germans, the key financial power in Europe, were digging in their heels today, wary of having the ECB intervene to help troubled countries and also of underwriting the loan guarantees.
The pressure to take such major decisions quickly was also intensified when Wolfgang Schaeuble, the powerful German finance minister, who is wheelchair-bound, was hospitalised in Brussels and the interior minister and Merkel's former chief of staff, Thomas De Maiziere, had to be summoned from Berlin.
But the decisions taken in Brussels looked likely to represent a major defeat for Merkel on a dismal election day for her Christian Democrats. For months she stalled on a rescue plan for Greece, while insisting that credits for Athens could be supplied solely on a bilateral basis from other countries and that there could be no multilateral, pan-European measures.
Within hours of Germany committing to supply more than €22bn to help Greece last Friday, however, the drama had moved on to threaten a crisis across Europe and beyond. Merkel had no option but to yield to the unprecedented European bailout measures.
Under the scheme, the European commission is put in charge of helping countries struggling to cope with soaring debt levels to raise money on the markets. Portugal, Ireland and Spain are the most vulnerable.
Today's move looked like a last-ditch act that might either presage the consolidation of the euro or lead to a meltdown of the currency and the unravelling of the single currency zone.
What began as an incipient crisis in Greece – representing less than 3% of EU GDP – last autumn has snowballed into a full-scale euro crisis, which could bring down large parts of the banking sector and tip much of the west back into recession.
source: guardian.co.uk
