Germany uses Ireland crisis to press for reform

23rd November 2010, Comments 0 comments

Germany said Tuesday that the future of the euro was at stake over the Ireland crisis, piling on the pressure for eurozone reforms as Portugal and Spain feel the heat from the markets.

"We now have the difficulties in Ireland, different from those in Greece but which are no less worrying," German Chancellor Angela Merkel said on Tuesday. "We find ourselves in an extraordinarily serious situation."

Earlier in the day, Finance Minister Wolfgang Schaeuble used a speech to the German parliament to say that the future of euro, a currency that Germany was instrumental in creating, was "at stake."

With its banking system on life support and its budget deficit on course to be more than 10 times the limit allowed under EU rules this year, Ireland threw in the towel on Sunday and asked for help.

European diplomats expect the country once hailed as the "Celtic Tiger" to ask for around 90 billion euros (120 billion dollars) from the European Union and the International Monetary Fund.

This is the second eurozone member in six months to raise the financial white flag after Greece did so earlier this year, and there are fears that other weak economies like Portugal might be forced to follow suit and even Spain.

Germany is Europe's biggest economy, accounting for a third of the eurozone's economic output -- compared to less than seven percent for Ireland, Portugal and Greece combined -- and is the biggest contributor to any bailout.

German voters are far from happy, and unease over the Greece bailout has contributed to a slide in popularity for Merkel's centre-right government. Observers even detect that Germans are going off the idea of a closer Europe.

Merkel was slammed by Bild over the bailout of "lazy" Greeks, and this week the mass-circulation daily has turned its attention to Ireland using its "scandalous" corporation tax rate to steal jobs.

The influential Spiegel magazine agreed that Merkel would have a "tough sell."

But the chancellor, 56, does not only have to worry about voters and the media. The constitutional court, Germany's highest, is yet to rule on the Greek bailout and is certain to look very closely indeed at any Irish aid.

Partly for this reason, Merkel wants to change the EU's Lisbon Treaty, toughening up the rules on budget deficits to punish member states with a chronic habit of spending more than they earn.

"The Stability Pact ... has severe failings, no one was ever fined under its terms. Merkel is right that it needs to be toughened, the French agree with her," said Jane Foley, senior currency strategist at Rabobank.

The head of the European Central Bank, Jean-Claude Trichet, has called for a "quantum leap" in economic governance, saying on Monday that 2011 would be a decisive year.

More controversially, Merkel wants to go further.

When the eurozone's current 750-billion-euro safety net expires in 2013, Germany wants it replaced with something ensuring that private investors, not just governments, lose money if government bonds are defaulted on.

"Those who make a nice profit on certain government bonds ... should also bear responsibility," Merkel said on Tuesday.

"There is no business in the world where 100 percent of the risks are held by the taxpayer and the state. Why should this be any different for those who trade in eurozone government bonds?"

The ECB fears investors will run a mile at such a system and other European governments are uneasy, making for tough negotiations ahead of a summit of the bloc's leaders in mid-December.

© 2010 AFP

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