Unprecedented rescue package to reinforce the Euro
- The twopronged rescue package includes a commitment by EU Member States to take significant measures of fiscal consolidation to reduce debt.
- The package is expected to create a financial backstop for the current crisis and safeguard the economic recover underway in Europe by creating preconditions for sustainable economic growth and employment.
- More information about the World Economic Forum on Europe at www.weforum.org/europe2010
The World Economic Forum on Europe opened today in Brussels. Over 400 leaders from business, government, academia and civil society from over 40 countries are participating. The meeting will be held from 10 to 11 May under the theme Renewed Leadership, New Vision.
Europe's historic decision to provide an unprecedented rescue package to combat Europe's sovereign debt crisis will "reinforce the euro in the face of recent systemic challenges to the Eurozone and Europe," predicted Olli Rehn, Commissioner, Economic and Monetary Affairs, European Commission, Brussels.
The "consolidation pact" is a twopronged package: a commitment by EU Member States to take significant measures of fiscal consolidation to reduce debt and a European stabilization mechanism created by the Economic and Finance Council, comprising the economics and finance ministers of the EU's Member States. "[This will] create a financial backstop for the current crisis and safeguard the economic recovery that is going on in Europe [by creating] preconditions for sustainable economic growth and employment," added the commissioner.
The biggest issue of concern for most is how the EU got into the position of having to take these measures in the first place. Valdis Dombrovskis, Prime Minister of Latvia, a Young Global Leader, whose country is scheduled to join the Eurozone by 2014, reminded participants that many countries in the Eurozone did not play by the rules laid out in the Maastricht Treaty, whereby government deficits were to not to exceed 3% of GDP. At the same time, control mechanisms, including sanctions, were eliminated in 2003.
"The budget deficit criteria were fine. But most countries do not fulfil the Maastricht criteria. This problem must be addressed before the Eurozone will be a zone of currency stability," he said. The prime minister was concerned about rumours of the European Commission suspending enlargement of the Eurozone, but said his country still intends to meet the criteria to adopt the euro by the deadline of 2012.
The rescue package of 720 billion euros, referred to by some as the equivalent of a "shock and awe" campaign, stopped Europe's spiralling debt crisis in its tracks and rebooted market confidence. Stock markets plunged last week over rising concerns about debt contagion from Greece, but rallied this morning after the European Commission's announcement. The package is expected to stop the crisis from spreading to other indebted PIIGS - Portugal, Ireland, Italy and Spain, together with Greece.
"All members of the euro area have committed to participate in the stabilization mechanism, which is based on loan guarantees from Member States. [This means] it is not an immediate burden for their budgets. The aim is not to use it. We are hoping the mere announcement of the mechanism would reinstill confidence in the market," Rehn explained. "It is absolutely essential now that we focus on the debt criteria to have healthier and more stable public finances in Europe."
The commissioner assured participants that closer monitoring of government finances and more rigorous enforcement of the deficit criteria will remain at the core of the internal surveillance mechanism of the euro area.
"It took a shock like this to show up the faults of the system," said Peter Westaway, Chief European Economist, Nomura, United Kingdom. "A strong mechanism is needed to ensure that [Member States] would abide by the rules and that the euro area would stand behind its members if they play by the rules of the game. This crisis might be the catalyst for structural reform in the weaker countries of the area. It could turn the [Eurozone] into a much more powerful economic entity."
However, the pain will be felt across European Member States as they grapple with the financial consolidation needed to secure macroeconomic stability. "It is going to be painful. Politicians are in the business of being elected or reelected and they will do things that are popular," warned Sir Martin Sorrell, Chief Executive Officer, WPP, United Kingdom, a Co-Chair of the World Economic Forum on Europe.
"There is a lack of political will in the UK to get the job done. Tough love is not something that sits well with the electorate. It is all about implementation, implementation, implementation." Sorrell pointed to German Chancellor Angela Merkel's party's resounding defeat this past weekend in the North Rhine-Westphalia elections as a signal to those politicians who "espouse fundamental reform".
Sorrel added that citizens are going to see the package as a "bailout", but Rehn argued that it is a "conditional financial rescue [with] very substantial conditions." For example, interest rates on loans would correspond to International Monetary Fund practices. "We have learned how to do it. We can react fast now," he added.
The Co-Chairs of the meeting are: Chander P. Gurnani, Chief Executive Officer, Mahindra Satyam, India; Jeffrey Joerres, Chairman and Chief Executive Officer, Manpower, USA; Lord Levene, Chairman, Lloyd's, United Kingdom; Sir Martin Sorrell, Group Chief Executive, WPP, United Kingdom; and Ruben K. Vardanian, Chairman of the Board and Chief Executive Officer, Troika Dialog Group, Russian Federation.
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