FMs look to avoid debt crisis

By Gabriele Steinhauser | October 19, 2010, Tuesday |

Print Edition

EUROPEAN finance ministers worked yesterday to hash out a deal on stricter budget rules to avoid another government debt crisis, as a surging euro casts doubt on the continent's fragile economic recovery.

They are considering two differing proposals spelling out penalties for overspending governments, after ballooning debt and deficit levels in countries like Greece, Ireland and Spain shook the foundations of the 16-nation eurozone earlier this year.

"Sanctions and debt criteria should be as specific and automatic as possible," Finnish Finance Minister Jyrki Katainen said as he arrived in Luxembourg for the meeting. This view is also supported by Germany and the Netherlands.

The two-day gathering comes amid the specter of a possible global currency war, as governments around the world try to boost their economies by pushing down the value of their currencies, thus making their exports more competitive.

The US Federal Reserve on Friday spurred expectations of a new round of asset purchases, in effect pumping US dollars into the economy and further weakening the value of the greenback. The euro was at US$1.38 yesterday morning Europe time, from under US$1.29 in early September.

Yet the European Central Bank, which sets monetary policy for the 16 countries that use the euro, appears likely to remain on the sidelines in any currency war.

Top EU officials, including ECB President Jean-Claude Trichet, have complained about China - a major trade partner - intervening to keep its currency weak. But the eurozone appears unlikely to take action beyond talk and diplomacy. In fact, several ECB officials in the past week have pushed for a quicker unwinding of the bank's crisis-relief measures, such as its government bond purchasing program.

"Countries should not use currency as a means of competition," Dutch Finance Minister Jan Kees de Jager said as he arrived for the meeting.

A hands-off policy by the ECB could mean trouble for the currency union's weakest members, which face harsh government budget cuts and are desperate for export-led growth.

"The eurozone is likely to be the loser in this," said Simon Tilford, chief economist at the Centre for European Reform in London.

Economy

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FMs look to avoid debt crisis

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