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Germany is divided over Europe’s bailout fund. Finland may be jeopardising Greece’s latest rescue. And Italy is suddenly backpedaling on austerity.
Jean-Claude Trichet and Mario Draghi, the current and incoming presidents of the European Central Bank, had a sharp message for Europe’s leaders on Monday as financial markets swooned: Get your act together.
At a conference in Paris focusing on the world three years after the collapse of Lehman Brothers, Europe’s top central bankers couched their admonishment in diplomatic terms. But the warning was clear: Politicians are still not moving quickly enough to ensure that the European debt crisis doesn’t become seriously worse.
“The solvency of sovereign states should not be taken for granted,” Draghi said as the bond yields of Greece, Italy and other countries with weak finances jumped amid increased investor nervousness. Global stocks also posted steep declines amid worries about the health of the US economy and Europe’s sovereign debt woes.
Europe needs to “make a quantum step up in economic and political integration,” Draghi said.
Trichet, who will be replaced by Draghi when his term expires at the end of October, renewed his call for European politicians to “imagine a federal government, with a federal finance ministry,” a setup that would make the monetary union look more like the United States.
But it is one that Germany and other countries are wary of pursuing because it could undermine their sovereignty.
These institutions, Trichet added, would have the power to “impose decisions on countries” whose own policy decisions threaten the rest of the euro zone, he said.
Their remarks came as European investors and bankers, including Josef Ackermann, the chief executive of Deutsche Bank, warned that the renewed volatility in stock and bond markets was starting to feel eerily like the days surrounding Lehman Brothers’ collapse.
“All this reminds one of the fall of 2008, even though the European banking sector is significantly better capitalised and less dependent on short-term liquidity,” he said on Monday at a conference in Frankfurt, Bloomberg News reported.
His comments were echoed by other players in the financial industry.
“I fear the probability is rising of a crisis in the fall, because there’s no more political margin for manoeuvre,” Denis Kessler, president of SCOR, a global reinsurance company based in France, said at the conference in Paris.
Benoit d’Anglelin, who was a Lehman banker for 15 years and is now a manager at Paris-based Ondra Partners, said he was seeing “extreme risk aversion now” by pension funds and institutional investors, which have been dumping “everything risk-related” since March, including a large number of shares in French companies.
“It’s becoming unsustainable,” he said. “Imagine what will happen if the selling gets more serious.”
Despite pledges by European leaders in July to pump billions of euros more into a European Union bailout fund for debt-stricken countries known as the European Financial Stability Facility, it is not so clear that parliaments in the 17 nations that are members of the euro club will approve an expansion.
Voters disillusioned with Germany’s role in supporting Greece and other troubled euro countries dealt Chancellor Angela Merkel’s party a fifth defeat this weekend in local elections, raising concerns among investors about whether she can muster enough votes to expand the fund.
On Sunday, Reuters reported, Slovakia added fuel to the fire when a politician said the parliament would not vote until December at the earliest on whether to expand the EFSF, much later than an early October deadline targeted by European officials.
“We have an absolute and total need for all of the decisions to be implemented immediately,” Trichet warned at the Paris conference. Delays or uncertainty, Draghi, added, “risk re-igniting market turbulence.”
Indeed, with a debt crisis threatening to worsen in Europe, and persistent economic weakness in the United States, markets have been moving more quickly to punish countries whose politicians are slow to make crucial decisions.
“This is not going to go away,” Draghi said.
In Draghi’s own country, Prime Minister Silvio Berlusconi again unnerved investors last week by chipping away at a sweeping ¤45.5 billion, or $64 billion, package of austerity measures to help Italy stave off a sovereign debt crisis. His backtracking drew a warning from Trichet over the weekend to stay on course.
Meanwhile, Finland has also cast doubt on pledges of European unity by insisting that it receive collateral from Greece in return for aid, another issue that threatens to upend plans to expand the bailout fund.
Draghi said that early warnings that the euro monetary union was “incomplete” because it lacked political cohesiveness had been papered over by banks and advocates who wanted to get the euro up and running at all costs.
“Now we are discovering that we can’t live with this incompleteness any longer,” he said.
