Debt crisis: Berlin experts fear euro break-up from bail-out escalation
Published 18/10/2011 | 07:44
PLANS to increase the firepower of Europe's bail-out machinery with extra leverage threaten France's AAA rating and risk setting off a dangerous chain of events, a top German institute has warned.
Berlin’s DIW institute, one of Chancellor Angela Merkel’s five official advisers, said attempts to boost the €440bn EFSF bail-out fund – possibly to €2 trillion – with guarantees to shore up southern Europe would be “poisonous” for France’s credit worthiness.
Dr Ansgar Belke, the group’s research chief, said the leverage proposal emerging as part of the EU’s “Grand Plan” to restore confidence is self-defeating. “It counteracts efforts made so far to stabilise the eurozone debt crisis, which are premised on the AAA rating of a sufficiently large number of strong economies. In extremis, it would probably cause the break-up of the eurozone”, he told newspaper Handelsblatt.
Berlin has played down hopes of a major breakthrough as EU leaders rush to complete their plan before a deadline next week. Mrs Merkel’s spokesman said “dreams that everything will be resolved and dealt with by next Monday cannot be fulfilled”.
European stock markets slid as traders took profits on the October rally, digesting Chinese data showing a sharp fall in new loans. Germany’s DAX fell 1.8pc, Italy’s MIB was off 2.3pc and the FTSE 100 eased 0.5pc.
Wolfgang Schäuble, Germany’s finance minister, said there would be no “definitive solution” but expected a deal to use an enhanced EFSF in “the most efficient way”. It is unclear whether such plans breach last month’s ruling by Germany’s top court, which said the Bundestag may not transfer “fiscal responsibilities” to EU bodies or take on “incalculable” liabilities beyond German control. Any change would need a new constitution and a popular vote.
George Magnus, of UBS, said the eurozone’s quest for a “Holy Grail” is likely to disappoint, warning moves to recapitalise banks may “accentuate the coming economic contraction in the eurozone by forcing the pace of asset shrinkage”. Refusal to expand the European Central Bank’s mandate leaves the system without an anchor.
“In the absence of a stronger ECB backstop, eurozone countries may end up piling up layers of possibly non-credible sovereign guarantees. This is just financial debauchery by another name,” he said.
Mr Magnus said a drive for economic growth is needed to pull Euroland out of its tailspin, and called for the austerity strategy to be “abandoned or softened”. “This would be more convincing in dealing with sovereign solvency than anything likely to be announced,” he said.