Global General
Huge rescue package stabilizes euro
(Xinhua)
Updated: 2010-05-11 10:18
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BRUSSELS - The European Union (EU) finance ministers agreed early Monday on a huge rescue mechanism to prevent the Greek debt crisis from spreading to other eurozone countries.
Analysts said the mechanism in place for eurozone member states could ward off contagion of the Greek crisis and stabilize the euro in the short run, but long-term challenges remain to be addressed by the 16-member bloc that shares the single currency.
Safety net to defend Euro
The European stabilization mechanism includes an aid facility to balance of payments to a value of 60 billion euros (about US$ 78 billion), with EU's own resources as guarantee, plus 440 billion (572 billions dollars) in funds or guarantees supplied by the eurozone member states, as well as a quantity from the International Monetary Fund (IMF) to the value of at least half of Europe's contribution.
At the press conference following the extraordinary meeting, European Commissioner for Economic and Monetary Affairs Olli Rehn said that the mechanism was "not only about Greece, but also about the euro area as a whole" and showed EU's determination to "defend the euro whatever it takes."
European Commission President Jose Manuel Barroso said on Monday that the massive rescue mechanism approved by the finance ministers would help investors regain confidence and boost the euro.
"This morning's agreement will ensure that any attempt to weaken the stability of the euro will fail," Barroso said.
"It shows the determination of the whole of the European Union to stand behind any of its member states when they are seriously threatened with severe difficulties caused by exceptional circumstances beyond their control," he added.
After the huge rescue mechanism was announced to the surprise of the market, the euro struggled out of a 14-month low last week and rose to 1.30 dollars on Monday. And US and European stocks markets also rallied.
Analysts said that the huge amount of money under the mechanism provided a safety net for euro area members with public finance problems and allay fears of a spread of the Greek debt crisis at least in the short run. It also assured the market of EU's determination to ensure stability of the euro area.
Long-term challenges remain
Despite the huge amount of money made available to eurozone member states, analysts said the rescue mechanism is only a crisis management instrument for the eurozone. The bloc has to address such long-term challenges as reducing its high public deficit and debt level, tightening fiscal supervision of member states, increasing economic governance and introducing structural reforms.
As a result of the financial crisis, public debt have skyrocketed across Europe and plummeting tax revenues combined with expensive economic stimulus programs have severely stretched budgets of many EU member states.
According to the latest estimates made by EU statistical agency Eurostat, EU's public deficit will surge to 7.25 percent of the gross domestic product (GDP) in 2010, more than two times the ceiling set by the EU Stability and Growth Pact. And the public debt ratio is to reach 79.6 percent for the EU and 84.7 percent for the eurozone this year, all far above the 60 percent ceiling set by the EU pact.
Marek Belka, director of the IMF's European Department, said at a seminar at the 2010 World Economic Forum on Europe held here on Monday that "The European countries amassed resources to provide emergency financing for those who need, but it's only a shot of drug to stabilize the patient and real treatment has to come."
He said longer-term problems have to be solved, such as fiscal sustainability and growing divergences in the eurozone area.
Martin Sorrell, chief executive officer of WPP Group, said at another session at the economic forum that the massive rescue package can convince investors for the moment but in the long run the eurozone countries have to introduce fundamental reforms.
Commissioner Rehn also said on Monday that a key lesson from the Greek debt crisis is that the eurozone has to enforce economic governance and increase fiscal supervision of member states.
