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UPDATE 3-Euro zone can bail out members if needed - Almunia
March 3, 2009 / 5:29 PM / 9 years ago

UPDATE 3-Euro zone can bail out members if needed - Almunia

(Updates with more Almunia, Steinbrueck comments)

By Jan Strupczewski and Marcin Grajewski

BRUSSELS, March 3 (Reuters) - The euro zone has a way of bailing out its members if they face a crisis before they have to seek IMF help, but this must remain confidential, European Monetary Affairs Commissioner Joaquin Almunia said on Tuesday.

Although no bailout possibility existed under European Union laws for euro zone countries, there was a solution that could be used, Almunia told a seminar.

“If a crisis emerges in one euro area country, there is a solution ... Before visiting the IMF, you can be sure there is a solution and you can be sure that it is not clever to talk in public about this solution,” he said.

“But this solution exists. Don’t fear for this moment -- we are equipped intellectually, politically and economically to face this crisis scenario, but by definition these kinds of things should not be explained in public,” he said.

Speaking at a later event in the European Parliament, Almunia said the euro zone was probably experiencing the worst moments of the economic crisis in the current months.

“We are living in those months in the worst period of the crisis,” he said. “I hope in few months we can consider the worst of the recession is behind us.”

German Finance Minister Peer Steinbrueck said in February that although EU rules said countries should not help each other within the currency area, all members of the bloc would have to help “if it came to a serious situation”.

In the same speech he mentioned Ireland as being in a “very difficult situation”. Other euro zone countries such as Greece have seen their bond spreads over Germany widen, reflecting worries about rising budget deficits and sparking market speculation about the possible break-up of the euro zone.

Almunia repeated no such option existed. “The probability of this happening is zero. Who is crazy enough to leave the euro area? Nobody. How many candidates to join the euro area I know? A number that is bigger than last year,” he said.

German Foreign Minister Frank-Walter Steinmeier also said on Feb. 20 that a process had begun to consider how financially strong euro zone nations could help weaker members, though it was too early to say what measures might be taken.

The chairman of euro zone finance ministers, Jean-Claude Juncker, had proposed issuing a common euro zone bond for the 16 countries sharing the currency, but this idea was shot down by Germany. France and the Netherlands are also reluctant.

Almunia repeated he believed a common bond would be good.

“I would say: yes, it is reasonable. As a politician I know that it is not politically viable today because some important member states said ‘no’. This requires a political decision that is not in the hands of the Commission,” he said.

EASTERN EUROPEAN BANKS

Responding to concerns about eastern Europe resulting from the crisis-induced sharp depreciations of local currencies in which people pay back loans taken in euros or Swiss francs, Almunia stressed each country was in a different situation.

He also said that because the banking sector in eastern Europe was dominated by western banks, the parent banks should make sure their eastern European subsidiaries could operate.

“They did not have toxic assets but now, with the recession, it is happening,” he said. “Who has to recapitalise, if needed, those banks? Indeed their home banks, their parent banks.”

Steinbrueck said in Paris that Germany and France backed moves to boost the IMF’s ability to help those hit by the global crisis.

Speaking after a meeting of Franco-German economic leaders, Steinbrueck welcomed the recent accord by the European Investment Bank, the World Bank and the European Bank for Reconstruction and Development to provide 24.5 billion euros ($31 billion) in support for eastern European banks.

He noted that Germany and France had declared at a summit on Sunday that further financial help for the region could not be funded at the moment but that further support would be welcome.

INFLATION, BUDGETS AND FX

Speaking just two days before the European Central Bank meets on interest rates amid market expectations of a 50 basis point cut to 1.5 percent, Almunia said inflation expectations in the euro zone were well anchored at the ECB target.

Almunia said there was a longer-term inflation risk from the billions of euros of extra fiscal stimulus that euro zone countries have mobilised to fight the recession.

“We face ... a risk of inflation provided that the consequences of fiscal stimuli are not withdrawn. It is difficult to withdraw excess liquidity in the boom and to fiscal excesses when the recession is be over,” Almunia said.

He said it was important for governments to formulate an exit strategy of returning to sustainable public finances in order to boost consumer confidence.

Asked if such an exit strategy should contain concrete dates and what they should be, Almunia said that the Commission will suggest such dates later in March in recommendations on when countries running excessive deficits should bring them back in line with the EU’s ceiling of 3 percent of GDP.

He also said the euro exchange rate against the dollar in the range of $1.2-$1.3 was considered normal and that the current euro/dollar exchange rate was “quite correct”. (Additional reporting by James Mackenzie in Paris; Editing by Ron Askew)

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