In a speech to the German Bundestag or lower house of parliament on Wednesday, Merkel defended the move for tighter budget policing in the European Union, saying Europe and the eurozone would emerge stronger from the crisis.
“Getting over the state debt crisis is ... a process. This process won’t last weeks, it won’t last months, it will last years,” she said.
There could be “setbacks but if we don’t let ourselves be discouraged ... Europe won’t just overcome the crisis but will emerge from it strengthened,” she added.
European Union leaders from 26 of the 27 member states agreed at a high-stakes Brussels summit last week to back a Franco-German drive for tighter budget policing in a bid to save the eurozone.
After Britain, which does not use the euro, blocked changes to an EU-wide treaty, the other 26 EU states signalled their willingness to join a “new fiscal compact” imposing tougher budget rules.
Merkel said that with such a fiscal compact: “The vision of a real political union is beginning to take on contours.”
Nevertheless, markets remained sceptical whether the moves decided in Brussels will be enough to prevent a break-up of the euro area.
European shares fell and the euro fell below $US1.30 for the first time in nearly a year.
Ratings agency Moody’s has said the crisis talks failed to produce “decisive policy measures” and threatened to review the credit ratings of all EU states within the next three months.
Standard & Poor’s is expected to decide this week whether or not to downgrade 15 of the 17 eurozone members.
Adding to the negative sentiment were comments by Merkel herself, in which she ruled out an increase in the European Stability Mechanism, the eurozone’s future permanent bailout fund.
The lending limit of the EMS, which EU leaders agreed at last week’s summit will be up and running a year earlier than planned, should remain at 500 billion euros ($654.15 billion), Merkel said on Tuesday.
Her stance underscores a rift among some European leaders over boosting the fund’s firepower and how best to tackle the eurozone’s fiscal woes.
With experts saying the amount will not be enough to rescue a country such as Italy, analysts at Moneycorp saw the remark as “the latest in a series of psychological blows to confidence in euroland and its sovereign borrowers.
“The German chancellor dropped another brick on the euro’s foot,” the analysts said in a daily investors’ note.
In Australia, deputy central bank chief Ric Battellino warned that markets appeared to be pricing in the possibility of a break-up of the eurozone.
“The formation of the euro area brought convergence of interest rates towards the low levels previously enjoyed only by Germany, but pre-euro relativities are now re-asserting themselves,” the Reserve Bank of Australia deputy said.
In two separate bond auctions on Wednesday, Germany saw the yield or rate of return on new two-year treasury notes decline amid strong demand for the issue, while yields on Italian five-year bonds rose to a euro-era record.
Such growing gaps in interest rates “suggests that markets are pricing in the possibility of a break-up of the euro area or a significant risk of default by some governments, or both”, Battellino said.
UK TO RESIST GIVING IMF MORE EURO BAILOUT FUNDS
Highlighting the numerous battles the eurozone faces in its attempt to extinguish the debt crisis, the British government has said it will resist any attempt by eurozone countries to press the UK to hand more cash to the International Monetary Fund to help fund a euro-bailout fund.
The IMF reported this week that eurozone countries at last week’s EU summit had agreed in principle to raise €200 billion for the IMF, including €50 billion from non-eurozone countries.
But the UK prime minister David Cameron’s spokesman said the prime minister had made it clear he had not agreed to this proposal and it had not been approved by the IMF board.
Cameron said at the Cannes G20 summit he would be willing to put more money to the IMF, but indicated the additional contribution could not exceed the €40 billion ceiling that has already been approved by British MPs in a vote earlier this year.
The UK has already committed a €30 billion contribution, meaning the UK could not commit more than an extra €10 billion without a further vote in parliament, something Cameron will want to avoid.
Any attempt to give the eurozone extra loans, even via the IMF, would be fiercely resisted by Eurosceptics in Cameron’s own Conservative party.
The reference to €200 billion fund was not made in the summit statement agreed last week but appeared in the official IMF magazine, Survey.
It said: “European leaders agreed to make bilateral loans to the IMF of as much as €200 billion - with €150 billion contributed by eurozone members and €50 billion from other members of EU.”
In the House of Commons in London, Cameron made no reference to specific sum, telling MPs: “Alongside non-European G20 countries we are ready to look positively at strengthening the IMF’s capacity to help countries in difficulty across the world. But IMF resources are for countries, not currencies, and cannot be used specifically to support the euro.”
The idea behind the IMF plan is to draw on the reserves of Europe’s central banks.
The President of the German Bundesbank, Jens Weidmann, said his bank was willing to provide loans to the IMF so long as nations outside the euro-area also contribute.
He said the Bundesbank has stated its readiness to provide up to €45 billion as long as there was a fair distribution of the burden among IMF members. If these conditions are not fulfilled, then we cannot agree to loan to the IMF.
He said it would be problematic if the US did not contribute.
There is a quiet satisfaction among UK government circles that the agreement made by the EU countries last week is coming under closer scrutiny and markets are starting to realise that it does not represent a major step forward.
GERMAN CABINET REACTIVATES BANK RESCUE FUND
While wrangling continued over Britain’s role in resolving the debt crisis, Germany reactivated its financial sector rescue fund as increasing questions about how banks can cover their capital needs are asked.
Merkel spokesman Steffen Seibert said the cabinet decided on Wednesday to reopen the €360 billion fund, first established at the height of the 2008 financial crisis.
The fund closed to new applications at the end of 2010. But much of the money - which totalled €60 billion for potential capital injections and €300 billion for loan guarantees - remains untapped.
European authorities have determined that German banks require a total of €13.1 billion in new capital to comply with tougher new requirements. The country’s second-biggest bank, Commerzbank, has been told it needs €5.3 billion.
Commerzbank said on Wednesday that a repurchase of securities will beef up its core capital by more than 700 million euros.
The repurchase of 1.27 billion euros of so-called trust preferred securities “will have a one-off positive effect of more than 700 million euros on our consolidated results and will result in a respective increase of Core Tier 1 capital,” Commerzbank said in a statement.
“The transaction marks another step in optimising our capital structure in light of the transition to the new regulatory requirements.”
Investors had from December 5-13 to decided whether to sell the securities back to Commerzbank.
Last week, the European Banking Authority said German banks needed to raise 13.1 billion euros in new capital to withstand future financial shocks.
According to the EBA’s calculations, Deutsche Bank, the country’s biggest, needed 3.2 billion euros and Commerzbank, the number two, needed 5.3 billion euros.
Analysts and investors have speculated about whether Commerzbank would be in a position to raise the capital under its own steam, or require state funding after it already had to be bailed out in the 2008-2009 financial crisis, which left the government with a 25 per cent stake.
The bank has said it can manage on its own.
CREDIT AGRICOLE TO CUT 2350 JOBS: UNION
A Commerzbank moved to shore up its capital, a French union claimed banking group Credit Agricole will cut 2350 jobs around the world, including 850 positions in France, mainly at its Cacib investment bank.
At Cacib, 1750 jobs will be cut globally, including 550 in France, said union Force Ouvriere’s (FO) representative for the bank, Bernard Pechard.
The bank’s consumer credit branch, CACF, will see 600 jobs cut, half in France and half in the rest of the world. Bank management held meetings on Wednesday with union officials representing staff at Cacib and CACF.
Pechard said he expected more job cuts would be announced when similar meetings are held at other Credit Agricole subsidiaries, including leasing arm Calef, which has 3100 employees, and equity broker Chevreux, which has 800.
Reserve Bank of Australia deputy chief Ric Battelino says financial markets appear to be pricing in a break-up of the eurozone.
Photo: Lee Besford
Credit Agricole, one of the biggest banks in Europe by capitalisation, employs 160,000 people around the world, a third of them outside of France, while Cacib employs about 15,000 people globally, including 4600 in France.
Like other French banks, Credit Agricole has been hit by its exposure to Greek sovereign debt amid the eurozone debt crisis and last month revealed a 60 per cent write-down of its holdings of Greek bonds.
The Moody’s agency earlier this month downgraded its credit rating on Credit Agricole’s long-term debt by one notch to Aa3, as it also announced downgrades on two other leading French banks, BNP Paribas and Societe Generale.
BNP Paribas expects to cut 1400 jobs globally, mainly in its corporate and investment bank CIB, unions said last month, while Societe Generale has also warned unions of plans to cut several hundred jobs.
FRANCE LOSING TRIPLE-A ‘NOT A CATACLYSM’
France also continues to prepare for the possibility that it will lose its triple-A debt rating, which Foreign Minister Alain Juppe maintained would be bad news but “not a cataclysm”.
Since the weekend, French officials have been preparing the ground for a ratings agency to decide that the nation’s public finances no longer merit a perfect debt rating, a result once seen as a disaster.
“It wouldn’t be good news, but it wouldn’t be a cataclysm either,” Juppe told the financial daily Les Echos, in an interview conducted on Tuesday. “The United States lost their triple-A and still manage to borrow on the markets in good conditions.”
Ratings agencies Standard & Poors and Moody’s have warned they are looking again at all eurozone member states - even triple-A powers like France and Germany - amid fears the bloc’s sovereign debts are unsustainable.
Eurozone members have tried to reassure markets by adopting austerity measures and promising to sign a new “fiscal compact” by March that would bind them to tighter budgetary discipline.
But many commentators believe the measures are insufficient to counter the sheer weight of debt being held by countries such as Greece and Italy - and in turn by private banks in France and elsewhere.
All member states have been warned but France is thought particularly vulnerable, despite President Nicolas Sarkozy’s vow to defend its rating.
AUSTERITY SHOULD NOT BE DONE TOO FAST: IMF
As France braced for a credit downgrade, the International Monetary Fund’s chief economist cautioned against countries exacting tough austerity measures too quickly, saying instead he favours a longer process as countries around the world grapple with high debt levels.
The IMF’s Olivier Blanchard said he was surprised over the debate over whether the best way forward was more stimulus to boost economic growth or tighter measures to deal with deficits, saying in most circumstances austerity would lead to contraction.
Public employees take part in a demonstration called by the main Spanish trade unions against austerity measures planned by the regional government of Catalonia, the Generalitat, on December 14.
Photo: AFP
Blanchard noted that there are some dire situations that have been improved by greater government responsibility, but the United States and most of Europe are not in such bad shape as to warrant that.
“It seems to me everybody should agree that the fiscal adjustment should be a long, drawn out, credible, medium-term process,” said Blanchard, who also said austerity was clearly needed.
He said he was worried that governments feel pressure to satisfy markets through very strong and very fast fiscal consolidation.
Asked about the debt crisis in the euro zone, Blanchard said that if Europe does not contain its short-run crisis, clearly the world will be affected in major ways.
But even assuming the region is able to get its debt problems under control, next year “is not going to be nice” for Europe, as bank deleveraging and fiscal consolidation will be a major drag on the economy.
As to the impact of the crisis on the rest of the world, “There is enormous ambiguity,” said Blanchard.
IMF SEEKS JOB CUTS IN DEBT-RIDDEN GREECE
However, even as Blanchard spoke, Greece’s rescue creditors pressed the debt-shackled country to fire excess public servants and further scale back workers’ pay rights.
The IMF’s top official in Greece warned the government it would not escape high budget deficits unless it switches efforts to spending cuts, arguing that the country’s taxpayers had reached the limit.
“There are no more low-hanging fruits,” Poul Thomsen told a financial conference in Athens on Wednesday. “We have clearly reached the limit of what can be achieved through raising taxes ... Lesson: We have to move the expenditure side.”
Thomsen urged the government to “move aggressively” reduce the size of the public sector.
“We are also warning that unless there is an acceleration of reform in the public sector - the deficit will get stuck at around 10 per cent,” he said.
“Greece might have to accept involuntary redundancies ... and address the legacy of too high and inflexible wages,” he said. “I cannot see how fiscal recovery can proceed without addressing these taboos.”
The IMF and eurozone countries have been propping up Greece’s economy with rescue loans since May, 2010 - imposing harsh spending-cut demands that have driven the country into recession.
Greece has admitted it will miss its deficit targets this year, with revenues still weak despite draconian tax hikes.
Greece is currently negotiating the terms of a second, massive rescue package, worth 130 billion euros, with eurozone partners and private bondholders.
Finance Minister Evangelos Venizelos said the terms of that agreement cannot be amended by future governments - effectively locking the country into the deal through 2015.
Venizelos is part of a month-old coalition government tasked with negotiating the deal ahead of a general election expected in the spring.
“Now is the hour to negotiate the new program that will shield us with (euro) 130 billion in additional assistance from our partners, that will cover our funding needs till 2015,” Venizelos told the finance conference. “After the agreement is signed and ratified, a renegotiation cannot be foreseen - these are terms set with our partners to more than double financial support for Greece, and retain our position in the euro.”
Venizelos said he believed talks with banks for a voluntary bond writedown could be concluded “without much difficulty”.
But nervousness over the state of the Greek economy is unlikely to fade soon as Prime Minister Lucas Papademos warned of a contraction greater than the 5.5 per cent forecast.
“2011 will be the worst recession here ever” with gross domestic product (GDP) contracting by “over 5.5 per cent” as the government has officially forecast, Papademos said at a dinner organised by the American-Greek Chamber of Commerce.
Greece’s economy shrank by 4.5 per cent in 2010.
“We have a hard way to go,” said Papademos.
The head of the IMF mission in Greece, Poul Thomsen, said earlier Wednesday that the Greek economy will go down “six per cent and maybe more” in 2011.
UNEMPLOYMENT AT 17-YEAR HIGH IN THE UK
In Britain, economic woes also continue to mount, with the nation’s unemployment hitting its highest level for 17 years. Women and young people are bearing the brunt of the deepening jobs crisis in the wake of the government’s austerity measures and the economy’s general weakness.
Figures from the Office for National Statistics showed that 2.64 million people were unemployed in Britain at the end of October - that’s the highest level since 1994 and 128,000 more than in the previous quarter.
Britain's Prime Minister David Cameron insists the government is trying to reduce joblessness.
Photo: Reuters
Unemployment among 16 to 24 year olds increased by 54,000 to 1.03 million - the highest level since records of youth employment started to be kept in 1992. And the number of women unemployed swelled by 45,000 to 1.1 million, the highest since 1988.
The British government has been heavily criticised for cutting programs that help young people break into the job market, and opposition leader Ed Miliband has said in the past that the country faces having a “lost generation” of people who find it impossible to get work.
Prime Minister David Cameron told MPs the government was trying to reduce joblessness.
“Any increase in unemployment is bad news and a tragedy for those involved,” he said. “We will do all we can to help people back in to work.”
The statistics office also revealed that public sector employment had also fallen by 67,000 to just below six million - the first time the level has been that low since 2003.
Cutting costs in the public sector has been a key part of the British government’s strategy to reduce the country’s debt. It has clashed with public sector unions over its austerity measures, with unions saying the cuts are unfair and hit poorly paid workers the hardest.
Dave Prentis, leader of the public sector union Unison, said the latest unemployment figures showed the government strategy is failing.
“The government continues to ignore the human cost and push ahead with its hard and fast cuts, clinging to the hope that a struggling private sector can pick up the pieces,” he said. “These figures deliver a cold hard dose of reality. It is shameful to see that yet again women, who make up the majority of low-paid public sector workers, are the hardest hit by job losses.”
The government had hoped that the private sector would create jobs to compensate for those lost in the public sector but the ongoing economic crisis has meant that a number of companies are struggling to stay afloat.
Tour operator Thomas Cook added to the bad news with an announcement on Wednesday that it will close 200 stores and cut more than 660 jobs in Britain as families with young children decide to stay home instead of holidaying at its all inclusive beach resorts.
Thomas Cook also reported its final year results on Wednesday, after postponing their release as it sought new agreements with its creditors. It said its operating profit fell 16 per cent to £303.6 million ($472.7 million).
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