The head of the European Commission, José Manuel Barroso, delivered a challenging “state of the union” speech for the EU warning that the union faces the toughest challenge in its half-century history, which he said can only be met by member states agreeing to be more integrated in the way they run their finances.
In his blunt speech on Sep 28, the day before a crucial vote in the German parliament about bailout funds for Greece and other debt-laden EU states, he called on the European Central Bank to take more pro-active measures to spur economic growth. Stimulus by the ECB – for example, by buying weak bonds to protect them from high market rates adding to countries’ debt burden – has been resisted by Germany, the Netherlands and some other governments. But Chancellor Angela Merkel said this week, during a visit to Germany by Greece’s leader, that Berlin would do whatever was required to help Athens find its way out of its predicament.
Her tone – accompanied by rumors of a bolder new EU plan to protect the euro – seemed to afford some hope of light at the end of the tunnel for the eurozone. Barroso’s comments also appeared to have what a commentator called “American fingerprints”—reflecting the new urgency felt in Europe after crisis talks among the world’s leading finance minister in Washington at the weekend.
Europe’s economic woes are already affecting the U.S. as a threat to American exports and to American investments in Europe.
Fresh determination in Europe and a more aggressive approach to shoring up the eurozone has crystallized in reports of a bold new plan to stop fallout from Greece's debt crisis from further hurting the world economy. As widely reported, the new plan is expected to involve a 50 percent write-down of Greece's huge government debt, while increasing the size of the euro zone bailout fund to $2.7 trillion.
The mechanics of the plan involve three main elements:
- A key step would be a quadrupling – from the current projected level of 440 billion euros – in the firepower of Europe’s main bailout fund, the European Financial Stability Facility (EFSF).
- This would be done by putting in place an arrangement that would allow the European Central (ECB) to lend alongside the fund.
- The EFSF would take on the main risk of lending to governments struggling to borrow from normal commercial sources – governments like Italy.
By leveraging the EFSF in this way, EU leaders could make it less dangerous for the ECB to lend to stricken governments.
European governments are expected to have the plan ready in five to six weeks, hoping that Germany and other governments can clear the political hurdles that are confronting them immediately – such as the German parliamentary vote. It took until this week for Slovenia, one of the EU’s smallest economies, to approve the existing bail-out plan.
And on Wednesday, the Finnish parliament approved the existing plan notwithstanding the earlier demand for "collateral" from Greece as a condition for approval.
European Affairs