BL: EU Officials Face Trichet Call for `Quantum Leap' in Policy as Euro Slides
By Mark Deen and Lorenzo Totaro
May 17 (Bloomberg) -- European finance ministers return to Brussels today as European Central Bank President Jean-Claude Trichet calls for a “quantum leap” in policy making to help stamp out the bloc’s sovereign debt crisis.
One week after agreeing to a $1 trillion financial lifeline for the euro region, ministers are under pressure to show they can reduce deficits fast enough to satisfy investors and then police budgets effectively once targets are met.
While Italy is following Spain and Portugal in announcing budget cuts, the drumbeat of skepticism about policy makers’ ability to end the crisis is getting louder. The euro dropped today to the lowest in more than four years against the dollar. The Euro Stoxx 50 Index on May 14 tumbled the most since March 2009.
“These are still measures taken under the gun,” said Marco Annunziata, chief European economist at UniCredit Group in London. “We need a credible strengthening of the euro zone’s fiscal rules to ensure discipline will be maintained after the immediate crisis is over.”
The European Commission said last week that it wants closer coordination and stricter rules, possibly including plans for euro-area finance ministers to submit spending plans to each other before their own parliaments vote on them.
‘Quantum Leap’
“There is a need for a quantum leap in the governance of the euro area,” Trichet said in an interview with German news weekly Der Spiegel published today. “There needs to be major improvements to prevent bad behavior, to ensure effective implementation of the recommendations made by peers and ensure real and effective sanctions in the case of breaches.”
Today’s meeting of euro-region finance ministers is schedule to start at 5 p.m. local time.
Changes to EU budget policy may take months or years to be implemented and for now governments across the region are scrambling to patch up their budgets.
Spain unveiled on May 14 the biggest cuts in at least 30 years and Portugal followed a day later, pledging to slash wages and raise taxes. Italian officials said yesterday that the government may make an extraordinary reduction in public spending, and France is slated to submit its latest tax and spending plans to the commission this week.
‘Target of Speculation’
“We need to have our public finances in order, otherwise we will become a target of speculation, too,” said Italian Public Administration Minister Renato Brunetta in an interview aired on RTL radio station.
The euro declined 3.1 percent against the dollar last week and continued falling today. The European currency traded at $1.2320 as of 11:50 p.m. in London from $1.2358 in New York on May 14, after earlier touching $1.2235, the lowest level since April 18, 2006. The euro has dropped more than 17 percent in the past six months.
ECB council member Ewald Nowotny said today the euro’s recent drop is of “no specific concern” for the central bank.
“We have no explicit exchange-rate target,” Nowotny, who heads Austria’s central bank, told reporters today in Berlin. “We are interested in orderly developments.”
The EU’s plan is nevertheless showing some signs of working as the ECB’s bond purchases give the most-indebted countries room to cut their deficits by keeping a lid on financing costs.
Risk Premium
The extra return that investors demand to hold 10-year Portuguese bonds over German bunds dropped by almost half to 179 basis points last week. The Spanish spread narrowed 56 basis points to 108 basis points and the Greek spread dropped almost 500 basis points to 485 basis points.
Even so, resistance to more European control is already sprouting in national capitals, with French Budget Minister Francois Baroin casting doubt on the legitimacy of the commission’s plans.
“We are sovereign states with elected parliaments and democratic governments,” Baroin said in an interview in the Journal du Dimanche published yesterday. Although having a European auditor review European budgets was conceivable, it would be an “after-the fact control, not an a priori censure,” he added.
Such sentiments are countered by Germany, the euro-area’s largest economy and the biggest single national contributor to the $1 trillion lifeline.
German Plan
German Finance Minister Wolfgang Schaeuble is working on a plan to create economic institutes that oversee national budgets, sanction violators with fines and remove their EU voting rights, WirtschaftsWoche said, citing a finance ministry document it obtained. The plan will be published May 21, it said.
Finance Ministry spokesman Michael Offer told reporters in Berlin today that the ministry is working on “concrete proposals” to help stabilize the euro, without being more specific.
The ECB decision last week to backstop the political leadership of the euro area by purchasing government bonds may have conditions attached, economists said.
“Trichet is constantly reminding the governments that the ECB will help in an emergency, but the institutional framework must be reformed and we need a mechanism to control deficits,” said Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in Paris. “Everyone is now aware that something has to be done and if it isn’t, the very existence of the euro is threatened.”
In his Spiegel interview, Trichet rejected the suggestion that the ECB gave up its independence when it agreed to buy bonds and stepped up pressure on the region’s politicians.
“That is ridiculous,” Trichet said. “Just who has been weak over the past few months? It was not the ECB. The governments with their high debts were weak.”
To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; Lorenzo Totaro in Rome at ltotaro@bloomberg.net.
Last Updated: May 17, 2010 07:03 EDT
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