March 31, 2020 / By mobanmarket
New fund would make €70 billion available to zone’s 16 member states to deal with ‘most serious crisis’ in the euro’s history.
Eurozone creates stabilisation fund
Leaders of the 16 eurozone countries have tonight agreed to set up a stabilisation fund to defend member countries against “speculative” attacks by the financial markets.
The fund, the draft details of which will be presented to EU finance ministers for approval on Sunday, is expected to have €70 billion available for use to help any member of the eurozone that is struggling to finance its debts because of high interest rates demanded by the financial markets.
Speaking in the early hours of Saturday morning after a six-hour meeting, Nicolas Sarkozy, France’s president, said that that eurozone was facing “undoubtedly the most serious crisis it has experienced since its creation”.
He blamed the hike in yields on eurozone sovereign debt on the actions of financial “speculators” that he said would be fought “mercilessly” by the EU institutions and national governments.
“From now on the speculators are onto a losing bet,” he said.
Herman Van Rompuy, the president of the European Council, said that eurozone members were facing “exceptional circumstances”.
He said that eurozone leaders and all EU institutions including the European Central Bank had agreed to use the “full range of measures available” to ensure the stability of the eurozone.
Eurozone leaders also agreed other rapid steps to defend the euro from speculative attacks and to restore long-term investors’ confidence in the euro and the state of its members’ finances, amid fears that the debt problems that caused Greece to seek assistance from other eurozone members and from the International Monetary Fund (IMF) are evident in other countries.
Reform of the financial sector
Leaders from the eurozone also pledged to make rapid progress on completing a new regulatory framework for financial markets. They stressed the need for more transparency on trading in derivatives and dealing with ratings agencies.
Several leaders, including Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, France’s president, have blamed financial-market turmoil on naked short-selling of credit default swaps.
They have also called for stricter regulation of credit ratings agencies, which they accuse of fuelling Greece’s, Spain’s and Portugal’s debt problems by downgrading their credit status at a point when it would do maximum harm to their reputation on financial markets.
As part of work on financial-markets regulation, leaders agreed to intensify efforts to improve crisis management in the financial sector and to ensure that the sector made a “fair and substantial contribution” to covering the costs of crises.
Several countries, including Germany, France and the UK, are planning to introduce levies on banks that would be used to recoup money expended to save banks during the financial crisis and to finance the orderly winding down of banks and financial institutions.
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Eurozone leaders decided to expand efforts to contain after the markets drove the yields demanded on Portuguese and Spanish government debts up to record levels.
“Now the attack is against the whole eurozone and not simply Greece,” Sarkozy said.
“We will not let the eurozone be destabilised…we will not let it be destroyed by the greed of a few people,” he added.
“If we do not stabilise the situation the whole world will be affected,” Sarkozy said.
“Monday, at the opening of the markets, Europe will be ready to defend the euro, that is the message we want to send,” he said.
Sarkozy said that the EU treaties required the decision to create the mechanism to be taken among all 27 of the EU’s member states, rather than by the 16 EU members that have adopted the euro as their currency. He said, however, that only qualified majority support, and not unanimity, would be needed to approve the measure.
José Manuel Barroso, the president of the European Commission, said that “the important point common to all these agreed elements is that we will defend the euro whatever it takes. We have several instruments at our disposal and we will use them.”
Public finances
The leaders agreed to accelerate action to consolidate public finances. Reading out a statement agreed by eurozone leaders, Van Rompuy said: “Each of us is ready, depending on the situation of his country to take the necessary measures to accelerate consolidation and to ensure the stability of public finances”.
EU member states also pledged to bring their deficits back down to around 3% of gross domestic product (GDP) by 2013-14. Deficits in many countries have soared to two or three times that level as governments have boosted public spending to prop up ailing banks or to help preserve jobs and businesses during the economic crisis.
Leaders also agreed that the rules of the stability and growth pact, which require eurozone members to keep their deficits to 3% of GDP, should be “strictly enforced”. In the past countries which have exceeded these limits have been treated leniently by their peers.
Economic surveillance will be increased and policy co-ordination will be enhanced, with “close attention [paid] to debt levels and competitiveness levels”. Until now, eurozone surveillance has focused primarily on deficit levels. While some countries, like Italy, have relatively low deficit levels, they have very high debt levels in relation to gross domestic product. Italy’s, for example, is 118% of GDP.
Some of Greece’s economic difficulties are due to a loss of competitiveness compared with that of other eurozone countries, especially a failure to ensure that wage rises are aligned with increases in productivity.
The statement agreed by national leaders says that work on assessing whether more steps are needed to deal with speculation against sovereign debtors should be sped up (also see box).
The euro has lost 4% of its value against the dollar this week. Yesterday, it fell to a fourteen-month low ($1.2529) and, against the yen, sold at its lowest value since December 2001. The Stoxx Europe 600 index lost 3.9% of its value this week – its worst weekly loss since November 2008.
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