World leaders warn Europe must act on debt crisis

SEVEN world leaders yesterday demanded Europe act more decisively to quell its debt crisis as a European Central Bank study warned that the entire euro currency project was now in peril.

As top finance officials gathered in Washington for meetings of the Group of 20 and International Monetary Fund, an open letter to G20 president, France, from the leaders of Australia, Canada, Indonesia, Britain, Mexico, South Africa and South Korea stressed the threat of the eurozone crisis spreading worldwide.

“Eurozone governments and institutions must act swiftly to resolve the euro crisis and all European economies must confront the debt overhang to prevent contagion to the wider global economy,” the seven leaders wrote.

“The eurozone must look at all possible options to ensure long-term stability in the world’s second largest international currency.”

US treasury secretary Timothy Geithner also stepped up his warnings to Europe, saying that stemming the crisis was more important than efforts to boost European growth, and that it was essential to provide enough resources to prevent a Greek default. But he expressed faith Europe would act.

“They recognise that if you let, as the United States did in the early part of 2008, the momentum of these concerns build, they’re very hard to arrest, much more expensive to arrest,” Geithner told a forum in Washington. “So you’re going to see them act with more force in the coming weeks and months.”

The ECB study was a parting shot from ECB chief economist Juergen Stark, who resigned this month after opposing the bank’s policy of buying troubled countries’ bonds. It was perhaps the most strongly-worded warning about the future of the euro from a central banker.

“Greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of (Europe’s Economic and Monetary Union) itself,” said the research paper, which was published by the ECB, but not endorsed by it.

The study, co-authored by Stark, recommended eurozone countries face tough new debt rules, have their deficits approved at a European level and if they reneged, face automatic fines.

More urgent is the need to bolster Europe’s banks and enable new powers for the eurozone’s bailout fund given that many economists expect Greece to eventually default.

The European Union’s new super-watchdog, the European Systemic Risk Board, warned that the knock-on effects of the debt crisis that began in Greece in 2009 had led to considerably higher risks of financial instability in Europe.

“The high inter-connectedness in the EU financial system has led to a rapidly rising risk of significant contagion. This threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond.”

The board, chaired by ECB president Jean Claude Trichet, called for “decisive and swift action” from policymakers, widely seen as being slow in the fight to contain the crisis.

It said that supervisors “should coordinate efforts to strengthen bank capital, including having recourse to backstop facilities, taking also into account the need for transparent and consistent valuation of sovereign exposures.”

Speaking on the eve of IMF and G20 meetings, Canadian finance minister Jim Flaherty joined a chorus of non-European officials warning that a new global credit crunch could bite unless Europe tackles Greece’s debt problems.

“The number one thing we’ll talk about ... is that Europe has to pick a lane here, they’ve got to deal with that issue respecting Greece,” he told the Canadian Broadcasting Corp.

“Otherwise the markets will get ahead, we will have some sort of a crisis, it will become a banking crisis, it will affect banks all around the world, we could be into another credit crisis which will cause contraction in the real economy. So we’ve got to deal with that,” he said.