Europe could take years to solve debt crisis: Merkel

14th December 2011, Comments 0 comments

German Chancellor Angela Merkel said Wednesday it could take Europe years to solve its debt crisis, as growing scepticism about the outcome of last week's EU summit weighed on financial markets.

In a speech to the German Bundestag or lower house of parliament, 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 1.30 dollars 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 ($650 billion), Merkel said 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.

Also weighing on investor sentiment was the announcement by the United States Federal Reserve that it would hold interest rates steady at record lows for some time to come, warning of severe headwinds for the global economy.

At a ceremony in Berlin to mark the 10th anniversary of the introduction of euro banknotes and coins, Bundesbank President Jens Weidmann regretted that the single currency, a symbol of European integration, had become a symbol of crisis.

The central bank chief argued that no matter how big the bailout fund was, it would not replace the pressing need for governments to get their finances in order.

"The bailout fund can only buy time, time that must be used to get to the real root of the problems," Weidmann said.

"Lasting confidence can't be bought with money alone. And we should get rid once and for all of the idea that the money can be raised simply by printing it," Weidmann said, dismissing calls on the ECB to dramatically upscale its purchases of bonds of the debt-mired countries.

© 2011 AFP

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