Euro Overhaul Effort Fades as Economy Gains, Sanctions Bid Ebbs
Spanish Finance Minister Elena Salgado
Jock Fistick/Bloomberg
Spanish Finance Minister Elena Salgado said, “We are in favor of applying the sanctions already included in the treaty, but not in favor of new ones.”
Spanish Finance Minister Elena Salgado said, “We are in favor of applying the sanctions already included in the treaty, but not in favor of new ones.” Photographer: Jock Fistick/Bloomberg
Sept. 7 (Bloomberg) -- Daniel Tenengauzer, head of emerging-market currency and rates strategy at Bank of America Merrill Lynch, talks about the prospects for the currency market. He talks with Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Germany’s push to stiffen penalties on deficit-plagued European governments ran into resistance as an economic rebound reduced the pressure on officials to protect the euro against future debt shocks.
European Union finance ministers remained divided over German calls for tougher sanctions, with Spain leading the dissenters. Germany’s plea for an EU financial-transaction tax also foundered on opposition from most governments.
“We are in favor of applying the sanctions already included in the treaty but not in favor of new ones,” such as the denial of EU infrastructure funds, Spanish Finance Minister Elena Salgado told reporters at an EU meeting in Brussels today.
Sparring over euro management and bank regulation came as sliding bond markets in Ireland and Portugal renewed concern that Europe might suffer a second debt trauma that tests European resolve to defend the common currency.
Ireland captured investors’ attention today amid speculation that the government might be overwhelmed by the costs of stabilizing Anglo Irish Bank Corp., which Standard & Poor’s said may need as much as 35 billion euros. Irish bonds fell, pushing the 10-year yield spread over German bonds to as much as 380 basis points, the highest since the euro’s launch in 1999.
“We were listening carefully to our Irish colleague and all of us were convinced that the government will be able to manage that situation,” Luxembourg Prime Minister Jean-Claude Juncker, who chaired the meeting of euro-region officials, told reporters.
Euro’s Decline
Portugal’s bond-risk spread also rose to a euro-era record of 355 basis points. In Greece, at the epicenter of the crisis, the spread reached 947 basis points, the highest since the EU pledged in May to spend as much as 860 billion euros to stem speculation. The 16-nation euro currency fell for a second day, dropping 1.3 percent to $1.2710 at 4:35 p.m. in London.
While bond spreads in Spain, Portugal and Ireland are higher than when the EU crafted the bailout package, none of those countries has been forced to follow Greece into drawing on EU and International Monetary Fund loans.
German Finance Minister Wolfgang Schaeuble, who at the height of the debt turmoil in March mused openly about expelling deficit-plagued countries from the euro region, said Europe’s economic recovery reduced the pressure to overhaul the system.
Economy Gains
The euro-area economy expanded 1 percent in the second quarter, the fastest pace in four years. A 4.4 percent jump in exports, the biggest in the euro’s history, led the way. Corporate investment rose 1.8 percent, ending two years of shrinkage, and consumer spending increased 0.5 percent, the most since 2007.
Schaeuble pressed for EU infrastructure aid to be withheld from deficit violators, while allowing farm subsidies to continue. He also asked governments to agree to sit out any votes in which they face penalties.
“There is also the question whether there can be sanctions beyond economic ones, such as those of a psychological or political nature,” Schaeuble said. “This is about the question of withdrawing voting rights.”
Euro rules foresee fines for countries that overstep the deficit limit of 3 percent of gross domestic product, though no country has ever been penalized. The European Commission will issue proposals on Sept. 29 that would make it harder for violators to escape punishment by forcing them to cobble together a majority to defeat a sanctions proposal.
‘Not Easy’
Also unclear is whether to punish countries for missing interim deficit-reduction targets, even if their deficit is under the limit.
“It’s a question of what to sanction that generates debate,” French Finance Minister Christine Lagarde said. ‘It’s not easy but they are fundamental.”
A German plea for a permanent crisis-response mechanism, which inspired this year’s emergency pledges to stanch the debt crisis, is also off the table because it would require amendments to the EU’s treaties.
Sweden, a non-euro member that weathered its own debt shock in the early 1990s, is disappointed with progress on fixing the euro region’s management, Finance Minister Anders Borg said.
“We need to have a clearer and better definition of what we mean with the different factors in the excessive deficit procedure,” Borg said in an interview.
‘European Semester’
Four months of debate yielded initial results today when finance ministers completed new rules on the pre-screening of government budgets.
Dubbed the “European semester,” the system will require each country to submit rough plans for the following year’s taxing and spending and economic assumptions to the EU by the end of April, with other euro-area governments providing an “assessment and guidance” by the end of July.
While such vetting would be a new wrinkle for the 11 1/2- year-old euro, the ministers failed to spell out the consequences for governments that defy the EU’s guidance.
“We expect that the member states would take into account these recommendations and take corrective action if needed,” EU Economic and Monetary Commissioner Olli Rehn told reporters.
EU President Herman Van Rompuy will report on progress at a Sept. 16 EU summit in Brussels. The ministers will meet again before the end of September to debate the reforms, with the goal of outlining the new system by late October.
To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net
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