Economies worldwide will be destabilised unless Germany unleashes a rescue package to stop the eurozone falling deeper into crisis, some of the world’s most powerful finance ministers warned yesterday.
The bleak message was conveyed in an emergency conference call between the ministers as Spain and Cyprus issued distress signals over their economies. A junior minister in Madrid said that Spain’s debts meant that lenders were no longer willing to issue credit, paving the way for another bailout. Greece, Ireland and Portugal have already received emergency help.
Cyprus admitted yesterday that there was a “serious possibility” that it would become the fourth eurozone country to seek a European Union bailout to save its banking system, which is heavily exposed to Greek debt. Christos Christofides, the deputy government spokesman, said that the country was looking at various ways to support the banks, which included finding a loan “from elsewhere”. It has secured a €2.5 billion low-interest loan from Russia.
George Osborne, the Chancellor, was among those warning that Germany needed to take action. British diplomats are pushing for the creation of German-backed eurobonds, which would make the eurozone nations more creditworthy.
Germany will accept common eurobonds, but only after “real fiscal union” in Europe, Wolfgang Schäuble, the German Finance Minister, said yesterday.
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He said that issuing eurobonds would be the last step in a long process — longer than that envisaged by France and the European Commission in Brussels, where eurobonds are seen as a panacea to prop up Spain and Italy before the euro breaks up. “The Government has always said that before we start talking about joint debt management, we need real fiscal union,” he said. More details emerged yesterday of Angela Merkel’s growth plan for Europe, which ties structural reform to the need for fiscal discipline and austerity — and rejects stimulus spending on the scale envisaged by France.
“Sustainable growth cannot be bought with public spending programmes, nor with state intervention or a monetary policy that is excessively lax,” the text says, according to a leaked draft.
It urges countries to “put in place conditions that are favourable to business activity, speed up the privatisation of state companies and reform their labour markets”. It adds: “Experience in Germany shows: courageous structural labour market reforms are essential to create more jobs and increase the economy’s flexibility.”
The blueprint is likely to be unacceptable to François Hollande, the French Socialist President, because it would weaken job protection and benefits.
Ms Merkel, the Chancellor, aims to present the document to the EU summit at the end of the month, while countries such as France are calling for economic stimulus measures.
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The United States, Canada and Japan all joined Britain in demanding more action from eurozone countries. The finance ministers were laying the groundwork before a crucial meeting of the G20 in Mexico later this month.
A senior Tory also said it was time to plan for a Greek exit from the eurozone. In a pamphlet for the Centre for Policy Studies, Andrew Tyrie, the Tory chairman of the Treasury Select Committee, said leaders should “take advantage of the breathing space afforded by the latest bailout to develop a contingency plan”.
Japan’s Finance Minister warned that its economy was being damaged by the European crisis as investors are buying Japan’s currency, perceived as a safe bet, making its goods harder to export.