George Papaconstantinou, the Greek finance minister, yesterday threw his weight behind calls to establish a permanent facility to organize bail-outs of European countries that hit financial troubles.
The minister, who was back in Washington just months after he had to apply for a rescue by the IMF in May, warned that similar crises might befall other eurozone countries.
However he insisted that Greece, for which the IMF and eurozone nations mounted a €110 billion bailout, would not default on its debts.
Speaking at the annual meeting of the International Institute of Finance (IIF), Papaconstantinou said the eurozone was still relying on the temporary European Stabilization Mechanism created in May to shepherd Greece through the crisis.
“The eurozone realized that what was initially a Greek crisis became a systemic crisis,” he said. “We need a permanent mechanism for crisis prevention.”
The main instruments now in place are the ESM, which provides loans and credit lines to countries in financial trouble, and the European Financial Stability Facility, which can issue bonds guaranteed by euro area members for up to €440 billion for on-lending to member states.
He said that the exact shape of a permanent mechanism was “the impossible question.” Papaconstantinou also suggested the implementation of tighter rules on fiscal behavior and improved systems for crisis prevention.
He said the essential feature of a new system would be its ability to take timely action, as “delays are costly and looking forward we should think of that in order to prevent future crises.”
In an interview with Emerging Markets, Papaconstantinou said that “the idea would be to have something to replace [the current three-year mechanism] on a more permanent basis, with clear rules, clear conditionality for countries that would be in a difficult situation.”
Papaconstantinou said he was “much more confident” about Greece’s outlook and dismissed the idea that it would have to attempt an orderly exit mechanism from the eurozone.
“Once you open that door then you are telling the markets to keep pushing until that door is found,” he said, adding that the strength of the eurozone lay in its cohesiveness.
He warned speculators not to “underestimate the willingness and capacity of the eurozone to defend its own in this political economic project”.
In the long term, the eurozone should provide “a mechanism to force a country to not have deviations in its fiscal programme but at the same time have a support mechanism such as to not be prey to what under the old model can be the excesses of the market.”
Jürgen Stark, a member of the executive board of the European Central Bank, agreed that timing was relevant. Speaking with Emerging Markets, he said “what we need is a quantum leap in fiscal and macroeconomic surveillance” and that the timing should improve.
“Sanctions should lose their current character of being an option only at the end of the budgetary surveillance process, when agreement is difficult,” he said.
Olli Rehn, European commissioner for economic and financial affairs, told Emerging Markets that “while the Commission is considering the merits of establishing a more permanent crisis resolution mechanism, I would not overload the discussion by making any reference to some kind of ‘European IMF’.”
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