Germans warn future of euro at stake as Spain feels pain
Published 24/11/2010 | 05:00
THE future of the euro is now at stake, German Finance Minister Wolfgang Schaeuble warned yesterday as European officials prepared a bailout package for Ireland and bank shares plunged.
Mr Schaeuble spoke as Spain became the latest country to come under pressure from the bond markets.
"The uncertainty puts our common currency at stake," he said as pressure mounted on the Government here to pass a Budget to ease the threat to other weak eurozone countries.
"If we can't defend this common currency as a sustainably stable currency the consequences would be incalculable," Mr Schaeuble said.
"It's extraordinarily important to show that it's possible in Germany to do what we've promoted so often abroad," he said, referring to Berlin's plans to cut more than €80bn from its budget over the next four years.
"We have every reason to continue decisively on this path," he added.
German Chancellor Angela Merkel echoed his sentiments warning that Ireland's economic woes had put the euro in an "exceptionally serious" situation. "I don't want to paint a dramatic picture, but I just want to say that a year ago we couldn't imagine the debate we had in the spring and the measures we had to take over Greece.
"We are facing an exceptionally serious situation as far as the euro's situation is concerned," Ms Merkel added.
She reiterated that "tough conditions" would be imposed on any nation that sought a bailout. "I won't let up on this because otherwise that primacy of politics over finance can't be enforced," Ms Merkel said. "It remains our task to keep calling for tough measures and tough conditions, but also to express clear support for the euro."
While EU leaders have said that Ireland's bailout will stem contagion in the euro region, there was fresh turmoil in the markets yesterday when Spain failed to complete a bond sale and its bond yields jumped to 4.9pc -- leaving the spread over German bonds at 2.35pc -- which is the sort of gap that started Ireland's crisis.
The pressure is also mounting on Portugal, the next country expected to need a bailout.
The fear is that any rescue package for Portugal could increase the pressure on Spain which is considered to be an economy that is too big to fail.
In Dublin, bank shares plummeted as investors couldn't get rid of them quickly enough. Shares in Bank of Ireland plunged as much as 31pc during trading -- eventually closing at 30c -- while shares in AIB closed down 19pc at 34c. Shareholders face dilution if more capital is injected into the banks. Central Bank governor Patrick Honohan said all the banks were effectively up for sale and admitted NAMA was not working as well as expected.
The euro fell 1.8pc against the dollar while the cost of borrowing for Ireland and other small and medium-sized economies such as Spain and Portugal jumped. European stocks dipped to a six-week low with the Stoxx Europe 600 Index posting its biggest one-day decline since August as all 18 stock markets in Western Europe slipped.
Meanwhile, Denmark is the latest country to indicate its willingness to lend money to Ireland to "help it get back on its feet".
Danish Finance Minister Claus Hjort Frederiksen said: "The support to Ireland will also benefit financial and economic stability in the EU."