GERMAN CHANCELLOR Angela Merkel is facing fresh pressure from world leaders to step up Europe’s response to the debt crisis as renewed pressure on Spain overshadowed the G20 summit in Mexico.
Dr Merkel held talks with US president Barack Obama last night before a wider meeting between the US president and European G20 leaders.
A draft summit communique reported by Reuters calls on Europe to take “all necessary policy measures” to settle the crisis, a statement which reflects concern that the euro zone debacle is weighing heavily on the recovery of the global economy.
“The world is very concerned about the slowing of growth that has taken place,” Mr Obama said after talks with Mexican president Felipe Calderón. “Now is a time, as we discussed, to make sure that all of us do what’s necessary to stabilise the world financial system.”
There was further pressure on euro zone leaders from British prime minister David Cameron.
“The euro zone has two choices,” he said. “Either they try to force down wages and prices in the periphery as fast as they can to restore competitiveness, with all the political and economic tensions that will entail, or the core of the euro zone has to do more to support the periphery through greater fiscal burden-sharing.”
The gathering at Los Cabos came a day after Greek voters backed the formation of a pro-bailout government, easing the immediate threat to the country’s membership of the single currency. The outcome was a “positive prospect not only for their forming a government, but also working constructively with their international partners”, Mr Obama said.
Fitch rating agency said the narrow victory of the pro-bailout New Democracy in the Greek election meant the near-term risk of a Greek disorderly debt default and exit from the euro had fallen. It warned, however, that the crisis in Greece and the wider euro zone remained intense.
“While the risks from Greece have fallen for now, the severity of the systemic crisis engulfing the euro zone is unlikely to diminish until European leaders articulate a credible road map that would complete monetary union with much greater fiscal and financial integration,” Fitch said.
“Downward pressure on the sovereign credit profile and ratings of euro zone sovereign governments will intensify so long as a credible path to closer union and a more coherent and united policy response are absent. This includes further boosting the financial backstops against contagion.”
Government formation talks in Greece were overshadowed by a record spike in Spanish 10-year borrowing costs, raising further questions over the viability of the €100 billion EU bailout of the country’s banks.
Any failure to arrest 10-year interest rates in excess of 7 per cent could result in Spain requiring a full-blown sovereign bailout, something which would overstretch the EU rescue funds and threaten Italy. Although certain senior Europeans acknowledge the Spanish rescue strategy has misfired badly, there is no serious talk on an alternative.
Spain is bearing the entire cost of bailing out its banks, something it wanted to avoid by securing direct rescue-fund aid for them.
European Council president Herman Van Rompuy said Europe more than shared the anxieties of global leaders about the debt debacle. “This crisis will take time to solve. There are no quick fixes nor silver bullets, but we will do all it takes to see it through,” he said.
