German Finance Minister Wolfgang Schaeuble said finance chiefs from around the world meeting in Tokyo this week have acknowledged that Europe has made “significant progress” in overcoming the crisis of confidence in the euro.
“This time there is a much more positive underlying sentiment” compared with earlier meetings, Schaeuble said today at a briefing with Bundesbank President Jens Weidmann in Tokyo, which is hosting the annual International Monetary Fund and World Bank meetings. European participants at the gathering have agreed that “we explain very precisely and openly what we’re doing, what we’ve achieved and what progress we’ve made.”
European countries are standing by their commitments to reduce fiscal deficits, Schaeuble said, citing a 50 percent reduction in the euro region’s fiscal shortfall since 2009, to 3.2 percent of the area’s gross domestic product.
Europe is on a “much, more promising path,” U.S. Treasury Secretary Timothy F. Geithner said yesterday. Canadian Finance Minister Jim Flaherty described the mood toward the region as one of “cautious optimism because it’s in a better place now.”
Europe’s strains are still the central challenge facing IMF members as they gather in Japan. The Washington-based lender said this week that failure to remedy them was contributing to an “alarmingly high” risk of a steeper slowdown in the world economy, already on course to expand this year by the least since the 2009 recession.
Europe must avoid raising false expectations and “misunderstandings” that can trigger disappointment, Schaeuble said, pointing to the reduction of Spain’s debt rating to one level above junk by Standard & Poor’s this week as an example. The rating company cited euro-region peers’ backtracking on a pledge to severe the link between the sovereign and its banks as Spain considers a second bailout.
Spain was lowered two levels to BBB- from BBB+, New York-based S&P said in a statement on Oct. 10. S&P assigned a negative outlook to the nation’s long-term rating and cut the short-term sovereign level to A-3 from A-2.
Germany, Finland and the Netherlands, the euro area countries with the highest credit ratings, on Sept. 25 said they rejected the use of bailout funds to deal with legacy debts such as those of Spanish banks. The joint position doesn’t contradict a pledge made by euro region leaders at a June summit, a Finnish official said the following day, after Spanish bonds dropped.
Schaeuble said today that to overcome government debt problems around the world and return to sustainable economic growth, it’s “decisive” to work on the causes and not take short-term steps that contradict medium-term goals.
IMF Managing Director Christine Lagarde today reiterated that Greece needs more time to meet its budget targets as part of its bailout agreement.
“At yesterday’s talks, at least there’s been a lot of consent to do what’s been decided in principle again and again since 2008, that is that we have to reduce too-high government debt and mustn’t create ever more liquidity globally,” Schaeuble said. “That’s fundamentally understood.”
Weidmann, who is also a member of the European Central Bank’s Governing Council, said an extension of the Greek program would generate higher financing needs. He warned governments not to rely on the ECB to solve the debt turmoil, saying monetary policy is “no secret medicine.”
On a controversy over a redistribution of voting rights at the IMF, Schaeuble insisted that the openness of an economy should be considered when deciding on the voting power of countries, a criterion that would work to Europe’s advantage.
While emerging nations such as China and South Korea want the voting formula to better reflect the size of their economies, Schaeuble said that while “we’re ready to make our contribution, the component of openness can’t be left out completely.”