Schaeuble Backs Euro Ouster for Delinquent States (Update2)

March 12 (Bloomberg) -- German Finance Minister Wolfgang Schaeuble called for “prohibitive” sanctions including expulsion from the euro region as the ultimate penalty for countries that repeatedly flout debt rules.

At the same time as he raised the specter of the breakup of the euro currency, Schaeuble also endorsed the creation of a European monetary fund to help deficit-plagued states as long as its lending was tied to strict conditions.

“Should a euro-zone member ultimately find itself unable to consolidate its budgets or restore its competitiveness, this country should, as a last resort, exit the monetary union,” Schaeuble wrote in today’s Financial Times.

Schaeuble’s views on the long-taboo subject of kicking countries out of the euro inflamed the debate over what the European Union can do to help Greece overcome the bloc’s biggest budget deficit. The risk premium on Greek bonds over comparable German debt has more than doubled since November on concern that it won’t be able to finance its debt.

Greek bonds gained today after falling yesterday on concern that public protests will sidetrack Prime Minister George Papandreou’s bid to cut the deficit to 8.7 percent of gross domestic product in 2010 from 12.7 percent last year. The 10- year yield fell 5 basis points to 6.26 percent at 2:10 p.m. Brussels time.

Strikes, Protests

Greece’s second general strike this year shut hospitals, airports and schools yesterday, and police skirmished with demonstrators, protesting 4.8 billion euros ($6.6 billion) in wage cuts and tax increases announced on March 3.

Unemployment in Greece slipped to 10.2 percent in December from 10.6 percent the previous month, the Athens-based National Statistics Service said today. The economy shrank 2.5 percent in the fourth quarter, less than the 2.6 percent initially estimated, the country’s national statistics agency said today.

Schaeuble’s call for the expulsion of unfit countries drew a rebuke from Luxembourg Prime Minister Jean-Claude Juncker, who heads the panel of euro-area finance ministers. Speaking to German N24 television, Juncker said he opposes such a “radical step.”

While saying his proposals were not specifically geared to Greece, Schaeuble offered backing for an EU emergency lending mechanism that would reduce the risk of defaults. He opposed euro members appealing to the International Monetary Fund.

“Strict conditions and a prohibitive price tag must be attached so that aid is only drawn in the case of emergencies that present a threat to the financial stability of the whole euro area,” Schaeuble wrote.

Voting Ban

Countries that repeatedly breach the deficit limit of 3 percent of gross domestic product should be denied EU “cohesion funds” for economic development and barred from voting on euro- region policies, Schaeuble said. Chancellor Angela Merkel endorses the proposals, government spokeswoman Sabine Heimbach told reporters in Berlin.

Echoing Germany’s original plans for the anti-deficit “stability pact” in the 1990s, Schaeuble urged “immediate” fines on deficit violators. That call was blunted by France in the runup to the euro. In 2005 Germany teamed up with France to further soften the penalties after they both went over the deficit limit.

A European version of the IMF also got the backing of Luxembourg’s Juncker, who shepherded the 2005 negotiations that loosened the deficit rules.

“We have a lack of an instrument to counter speculation and irrational behavior, which possibly could endanger the stability of the euro area,” Juncker said today in an interview in Bonn. While the EMF’s setup would take too long to help Greece, it wouldn’t breach EU rules against the bailout of governments, he added.

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net