Investors in global markets pinned a lot of hope on the two-day meeting, expecting it to provide a message of unity and strong governance within the monetary union. But at the end of day one, analysts say so far this message still can’t be heard. Instead, many say, a new level of dissent has emerged, this time between Europe and the US.
In a sign of growing international concerns about the crisis, US Treasury Secretary Timothy Geithner took part in the talks.
According to the Dow Jones news agency, Mr. Geithner urged his EU colleagues to overcome their divisions on how the debt crisis should be solved. He reportedly said: "What's very damaging is not just seeing the divisiveness in the debate over strategy in Europe but the ongoing conflict between countries and the European Central Bank."
His remarks were not received well. Austrian Finance Minister Maria Fekter seemed to speak for most of her colleagues when she said, rather frankly: "I found it peculiar that even though the Americans have significantly worse economic data than the eurozone, they tell us what we should do."
But observers of the talks sided with Geithner. “What we should get from this meeting in Wroclaw is a clear roadmap on how to solve Europe’s debt crisis,” says Jan Randolph, Director of Sovereign Risk with the IHS information service in London. “They have to stop the mixed signals coming from policy makers. But we might be disappointed.”
The so-called Ecofin meeting – a monthly gathering of European finance ministers plus the head of the European Central Bank and the EU’s finance commissioner – had several issues on the agenda:
• When to hand out fresh money to Greece to help it avoiding insolvency
• Whether to accept Finland’s demand Greece should provide some form of collateral for any further credit
• How and when to enlarge the European rescue fund (EFSF) which has been created to help other eurozone members in financial trouble
• And whether Europe should follow America’s example and put up an economic stimulus plan.
Behind all these issues is the question of the eurozone’s future: Can it survive without member countries giving up sovereign powers like budgetary and fiscal authority.
“Looking at the overall debt situation in the eurozone, it should be manageable,” Mr. Randolph says. “But there are so many governments with differing agendas involved, it’s proving to be quite a challenge.”
Consensus seemed to exist in the rejection of Geithner’s proposals. “We don’t see any scope for a new fiscal stimulus package within the eurozone,” said Eurogroup chief Jean-Claude Juncker. And Geithner’s demand the European rescue fund should be increased beyond its current size of 440 billion euros ($606 billion) was dismissed by German Finance Minister Wolfgang Schäuble saying European taxpayers were unlikely to agree.
There was no official statement on the possibility of a Greek default, instead the meeting postponed a decision on when to issue the next tranche of 8 billion euros ($11 billion) bailout money to the Greek government until October. Experts say that Athens has funds to keep the state going for another month only.
One thing the EU finance ministers did agree on was a stricter stability pact. The current pact imposes limits on budget deficits and public debt level of member states, but few countries have been following those rules. In the future there will be fines for such cases.
“This is too little,” says Lans Bovenberg from the Tilburg School of Economics in the Netherlands. “Even a stricter stability pact will be difficult to enforce. What I do hope they have been doing behind closed doors is working on Plan B – how to handle a Greek default.”
Professor Bovenberg, and many other analysts, say a Greek sovereign default is inevitable, and can be managed and contained as long as the necessary mechanisms are in place.
“Mr. Geithner is right to ask for a bigger European rescue fund,” says Bovenberg. “As soon as financial markets know that other European economies can be supported through the rescue fund, the risk of contagion by a Greek default is minimized.”
On Thursday, leading banks in the EU, US, Britain, Japan, and Switzerland agreed to provide US dollars to the European banking system, taking pressure off banks, which found it hard to find lenders due to the amount of Greek debt they are holding. This move, and the expectation of positive signals coming out of today’s meeting in Poland, caused global markets to pick up Thursday and Friday.