European leaders were told by policy makers, bankers and academics from around the world that it’s time to end the region’s debt crisis and measures aimed at simply containing it are no longer enough.
Five days of debating and partying at the World Economic Forum’s annual meeting ended yesterday, with the euro area under pressure to swiftly deliver a bigger bailout fund that could help build a firewall worth more than $1 trillion. Leaders were also told they need to finish crafting tougher budget rules, and finally make Greece’s debt burden manageable.
Failure to comply would threaten economic growth and financial markets, as well as deprive the region of more outside support, said delegates including billionaire investor George Soros and U.S. Treasury Secretary Timothy F. Geithner. How far Europe’s officials are willing to go in response may be revealed at a Brussels summit today.
“There’s a very strong view of get on with it, get this thing done,” Bank of Canada Governor Mark Carney told Bloomberg Television in Davos, Switzerland.
The caution against complacency came toward the end of a month in which signs of stabilization emerged in Europe as market lending rates eased, economic indicators showed some resilience and bond yields fell from Spain to Italy. At the same time, banks are still cutting lending, Portuguese borrowing costs are surging and Greece faces a 14.5 billion ($19 billion) euro bond repayment in March.
Carney estimated Europe’s woes will subtract 1 percentage point from global growth by the end of 2012 “and that’s in a world where this crisis is contained.”
“It’s not just a euro-zone crisis, it’s a crisis that could have spillover effects around the world,” International Monetary Fund Managing Director Christine Lagarde said. She came to Davos promoting her push for $500 billion in new crisis-fighting money for the Washington-based lender.
The main solution proposed was increasing the euro region’s own funds from the planned limit of 500 billion euros that will take effect in July. EU officials already plan to reassess that amount in March and have the option to push it even higher through leverage. That could swell it to a level triggering donations to the IMF from around the world and result in an overall warchest worth at least $1.1 trillion
Both the French and Spanish finance ministers told Davos delegates they’d support increasing the rescue fund even in the face of German opposition.
“The only way Europe’s going to be successful in holding this together, making monetary union work, is to build a stronger firewall,” Geithner said. Soros said in an interview “not enough has been done to ringfence” the region from the risk of a Greek default.
Strengthening the defences was regarded as a pre-requisite by officials from the U.K. to Japan if they are to stump up emergency cash for the region and channel it through the IMF. European governments must show the “colour of their money,” said U.K. Chancellor of the Exchequer George Osborne.
There was unanimity that Greece remains Europe’s weakest link as talks between the government and bond holders on a debt restructuring dragged on through the weekend. Failure to strike a deal could deprive the country of a second bailout package required to keep its finances afloat.
“The fact we’re still at the beginning of 2012 talking about Greece is a sign this problem hasn’t been dealt with,” Osborne said.
Bank chief executives in Davos disagreed over the fallout if Greece reneged on its debt. Deutsche Bank AG’s Josef Ackermann said in an interview that a default would be “playing with fire,” while JPMorgan Chase & Co.’s Jamie Dimon told CNBC it would not be a “disaster.”
For all the angst, conference-goers expressed optimism that European leaders may now be more aware of the risks of failure so more willing to act.
“There is evidence Europe is starting to turn a bit of a corner,” John Phizackerley, Nomura’s chief executive officer for Europe, Middle East and Africa, said in an interview.
While German Chancellor Angela Merkel used her keynote speech to rebuff calls for bigger bailout reserves, she is “absolutely convinced that we will be able to master this crisis.” Merkel meets other euro leaders in Brussels today to continue work on fortifying the region’s budget rules.
If there was a hero of the week it was ECB President Mario Draghi, who won widespread praise for his decision last month to loan banks an unprecedented 489 billion euros for the next three years. Still, even his fans warned it only gave governments and banks breathing space to remedy their problems.
“I’m really glad the ECB took these actions, but let’s not be complacent,” World Bank President Robert Zoellick said. “This buys time, you still have to act.”
The mood was bleakest among economists and historians. Nouriel Roubini, co-founder of Roubini Global Economics LLC, described Europe as a “slow motion train wreck” and said Greece may be forced out of the euro within a year.
Harvard University professor Niall Ferguson said the crisis remained one of solvency. Only an agreement by Germany to transfer cash to indebted nations and issue joint debt would end it.
“Optimism is ill-advised,” said Ferguson, a Bloomberg News contributor. “As often happens, there is temporary respite and then markets wake up and everyone realises the crisis isn’t over.”