Geithner meets eurozone leaders: a step toward taming debt crisis?

In Europe, US Treasury Secretary Geithner backs the European Central Bank's pledge to do 'whatever it takes' to save the eurozone from a potential breakup and boost economic growth.

By , Staff writer

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    German Finance Minister Wolfgang Schaeuble (l.) speaks with US Treasury Secretary Timothy Geithner (r.) in the house where Mr. Schaeuble is vacationing, in Westerland on the German North Sea island of Sylt on Monday.
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US Treasury Secretary Tim Geithner met with some of Europe's top financial leaders Monday, amid rising investor hopes that new financial rescue efforts are about to begin.

Mr. Geithner dropped in on German Finance Minister Wolfgang Schaeuble, and then held a conclave with Mario Draghi, president of the European Central Bank.

The backdrop for the meetings was storm clouds – both literally, on Germany's North Sea island of Sylt, where Mr. Schaeuble is vacationing, and figuratively, in the form of a worrisome rise in interest rates in Italy and Spain.

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Those are some of the largest nations within the European Monetary Union. The interest-rate jump signals worry about whether they can generate enough economic growth to cover their large and rising public debts.

Last week, Mr. Draghi said the European Central Bank (ECB) stands ready to do "whatever it takes" to save the eurozone from a potential breakup. Those were strong words, symbolic of how important it is for Europe's leaders to hold investor confidence.

Stock markets surged last Thursday on Draghi's remarks, as investors took his words as a signal that the ECB might announce plans to purchase bonds of eurozone nations, in a bid to dampen interest rates and fuel growth. Simultaneously, the US Federal Reserve has been edging toward a possible "QE3" program, using so-called quantitative easing to stimulate the tepid US economy.

The central banks both have policy meetings this week, with investors especially focused on the European meeting Thursday.

Although it's not clear what leaders discussed in private, economists say Mr. Geithner's goal was partly to nudge Germany to back new steps that could bolster short-term economic growth. So far, Germany has largely played the role of a wary creditor nation, reluctant to undertake economic stimulus and eager to see high-debt European nations tighten their fiscal belts.

In a recent TV interview, Geithner implicitly criticized that approach. "If you leave Europe on the edge of the abyss as your source of leverage, your strategy's unlikely to work because you`re going to raise the ultimate cost of the crisis [and] you do a lot of damage to the politics of those countries because the human costs of what`s happening, not just in Greece but across Europe," the Treasury secretary told CBS interviewer Charlie Rose.

The all-important near-term question: Just how much is the ECB prepared to do?

"If you had just landed from planet Mars, and this was the first time that you had heard the ECB speak on this issue, you might think that it was about to fire a big bazooka [to rescue] sovereign bond markets," says David Mackie, an economist at J.P. Morgan. "But having listened carefully to the central bank over the last two and a half years, we don't think that is about to happen."

Even if the ECB takes strong action Thursday, the longer-term question will still be unresolved: Can the currency union save itself from the centrifugal force of economic disparities among member nations. Some prominent economists are skeptical that the eurozone can hold together, while others think it will.

Either way, it could be a messy and lengthy process, including what many view as the likely exit of Greece as a member country.

In a Reuters poll, 19 of 24 money-market traders said they expect the ECB to restart its mothballed bond-buying program, with purchases of Spanish and Italian debt. But only about half of them said they expect the announcement will come on Thursday.

After the talks Monday between Geithner and Schaeuble, their agencies issued a brief joint statement, presenting a modicum of unity. The statement said the two officials "emphasized the need for ongoing international cooperation and coordination to achieve sustainable public finances, reduce global macroeconomic imbalances, and restore growth."

Material from Reuters was used in this story.

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