European Finance Ministers Look to Strengthen E.U. Rules

15 january 2013

BRUSSELS — European finance ministers said Wednesday that they were counting on an agreement next week on stronger fiscal union to restore investor confidence in the euro zone and persuade the European Central Bank or the International Monetary Fund to intervene to restore calm in debt markets.

The Polish finance minister, Jacek Rostowski, who was chairman of the meeting of 27 E.U. finance chiefs, said an agreement on new plans by Germany and France to tighten the euro zone’s rule book must be accompanied by “extremely forceful” measures to reassure jittery investors of the solidity of the currency zone.

The coordinated intervention Wednesday by six central banks to increase liquidity, especially in European markets, will not be “of itself sufficient” to resolve problems in the sovereign debt market, he added.

Though the French-German plan, which has still to be outlined, could take months if not years to implement, the hope is that a deal on its content at a summit meeting next week of E.U. leaders will be enough to persuade the E.C.B. and the I.M.F. of Europe’s political will to resolve the crisis.

“The feasibility of interventions by both bodies depends on making progress on institutional matters such as moving toward fiscal union,” said Mario Monti, the Italian prime minister. “The euro summit of next week will be fundamental because further progress has to achieved on the governance of the euro zone.”

Olli Rehn, the European commissioner for economic and monetary affairs, said the euro zone was “now entering the critical period of 10 days to complete and conclude the crisis response of the European Union.” That, he said, means working on creating “sufficiently credible financial firewalls” and creating tighter rules for the common currency.

Late Tuesday, finance ministers from the 17 euro zone countries agreed on ways to increase the firepower of their bailout fund, while acknowledging that they may need to turn to the I.M.F to help it achieve the €1 trillion, or $1.3 trillion, target set for it.

Jean-Claude Juncker of Luxembourg, who heads the Eurogroup of euro zone finance ministers, told RTL Luxembourg radio on Wednesday that a bailout fund with capacity of €750 billion was more likely, given current market conditions.

Some European leaders think that, by increasing their own contributions, other countries and multilateral entities may be persuaded to help, too.

“We are prepared to increase the resources of the I.M.F. through bilateral loans,” said Wolfgang Schäuble, the German finance minister. “Naturally, the details would have to be discussed.”

But there is little doubt that the stakes are rising with the approach of the meeting of E.U. leaders in Brussels next Thursday and Friday.

While Mr. Rostowski rejected the idea that the euro zone could break up, he said that “if action is not taken, that possibility could become a real danger.”

The French-German plan for tighter integration is thought likely to involve changing the European Union’s governing treaty — something that, because it involves ratification by most if not all 27 countries, is unlikely to be accomplished quickly, Mr. Rostowski said.

Asked if he was appealing for intervention in the bond market by the E.C.B., Mr. Rostowski replied that “anything that works” was fine by him. Germany has so far resisted a greater role for the central bank, which has already bought substantial amounts of bonds of distressed euro zone countries like Italy and Greece, but most other countries increasingly see the central bank as the only short-term solution to the crisis.

The two-day meeting of finance ministers was a reminder of the range of problems confronting the euro zone.

Late Tuesday, the euro zone ministers approved the disbursement of their share of €8 billion in loans to stave off a Greek default. They were also warned that slow growth was hampering Italy’s chance of escaping the debt crisis, in turn threatening to make the country insolvent and drag down other large countries that use the euro.

A paper presented by Mr. Rehn highlighted “lackluster growth performance and funding problems of the banking sector,” and said the economic slowdown was “undermining the credibility of fiscal targets.” Mr. Monti is aiming to achieve a balanced budget by 2013.

The document warned that, if interest rates remained high, the situation could deteriorate. “A liquidity crisis could then turn into a solvency crisis, whose repercussions for other large euro area countries would be very acute, given their exposure to the Italian economy,” it concluded.

Euro zone finance ministers also agreed on rules to leverage their bailout fund, the European Financial Stability Facility, to enable it to offer insurance to those buying bonds of countries like Spain or Italy. Insurance certificates attached to make bonds more attractive will be tradable themselves, said Klaus Regling, who heads the rescue fund. The fund will also seek investment from sovereign wealth funds and other non-European sources.

Late Tuesday, Mr. Juncker said the ministers would explore “further options” to beef up the fund. “We also agreed to rapidly agree an increase in the resources of the I.M.F. through bilateral loans, following the mandate of the G-20 Cannes summit, so that the I.M.F could adequately match the new firepower of the E.F.S.F. and cooperate more closely with it,” he added.

Neither he nor Mr. Rehn would elaborate on this idea, or whether the E.C.B. might be involved, though officials said that an increase in Europe’s contribution to the I.M.F. might unlock aid from other sources.

“I think the E.F.S.F. alone will not be able to solve all the problems,” said Luc Frieden, Luxembourg’s finance minister. “We have to do so together with the I.M.F. and with the E.C.B., within the framework of its independence.”