By James Kanter and Melissa Eddy, New York Times, March 26, 2012
BRUSSELS — The European Union took a big step on Monday toward building a financial firewall strong enough to prevent the spread of fiscal contagion to major economies like Spain. The move came after Germany dropped its opposition to bringing the Continent’s total bailout capacity to more than 690 billion euros ( $916 billion).
Angela Merkel, the German chancellor, said on Monday at a news conference in Berlin that her government remained determined that a permanent European rescue fund should be capped at 500 billion euros.
But in a big concession, she said Germany would not oppose letting that fund operate alongside a temporary fund that has aided Greece, Ireland and Portugal but still has money to lend.
German officials cautioned that many details needed to be negotiated at a two-day summit meeting of European Union finance ministers that starts on Friday in Copenhagen.
But Ms. Merkel’s statement effectively gives the green light to expanding the size of the firewall, as the United States and others have been urging.
It also shows renewed determination to shore up the stability of the euro zone while the overall European economy remains fragile and concerns are mounting about the Spanish government’s rising costs of borrowing.
Ms. Merkel and her finance minister, Wolfgang Schäuble, have long opposed expanding the bailout fund any further, as they seek to shield German taxpayers from higher liabilities. There is already widespread discontent among Germans about shouldering most of the cost of rescuing weaker European partners like Greece.
Germany also was hesitant to commit more money before countries that might eventually need assistance, including Italy and Spain, showed they were serious about removing barriers to competition and other impediments to growth, said Silvio Peruzzo, an economist at the Royal Bank of Scotland.
“The German strategy has been pretty clear,” he said. “They wanted to keep the pressure on some euro zone member states in terms of reforms.”
The money already given out in loans by the temporary bailout fund — known as the European Financial Stability Facility — was originally supposed to count against the lending power of the permanent fund when it goes into effect this summer.
But under the new flexibility indicated by Ms. Merkel, the temporary fund’s lending program might be allowed to continue without counting against the new 500-billion-euro fund, known as the European Stability Mechanism, when it goes into operation in July.
The new fund will spread the risk more evenly among the participating nations than the temporary fund, which left German taxpayers more exposed.
A permanent resuce fund, operating alongside the temporary fund, will spread the risk more evenly among more members of the European Union, and also establish the principle that, in this world, there is much more interdependence than complete independence.
It would seem that there have been several conversations between Christian Lagarde and Ms Merkel over this issue, given the earlier gap that apparently existed between them on this issue.
Now, if this "permanent rescue fund" could only be expanded to include Asia and North America, or even separate funds for each region as a beginning, we could start to see a shift in perspective among world leaders from insular self-interest to a broadened and integrated common interest in the need to solve problems of a global nature collaboratively.
Of course, in this endeavour, it will likely be the United States and to a slightly lesser degree Canada that will be stumbling blocks, given the reluctance to link their government decisions to those of any other country or group. Parochialism, under any circumstances, is no substitute for pragmatism, yet it defines much of what many Americans considered "their special status" and thereby their exemption from global initiatives. And some of the argument they use is clouded with the "small government" imperative of the increasingly loud "right".
We applaud the decision of the German Chancellor and her finance minister, and hope that the Bundestag will endorse her leadership on this issue, and that it is announced favourably in the capitals around the world putting legitimate pressure on other world leaders who steadfastly look inward at the expense of the whole world community.