Row erupts over eurozone crisis response
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Row erupts over eurozone crisis response

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Global finance leaders clashed over how to resolve the European sovereign debt crisis at the IMF meetings in Washington this weekend

A row over how to resolve the European sovereign debt crisis broke out yesterday at the IMF meetings in Washington, threatening to trigger a fresh wave of volatility when markets open tomorrow.

The US and the UK led public calls on eurozone finance ministers to take more decisive action to prevent the crisis in Greece spilling over to the rest of the eurozone.

But eurozone policymakers yesterday issued a robust defence of their position not to go any further than measures agreed in July, saying that any attempt to organise fresh bailouts or issue eurobonds would be “disastrous”.

Timothy Geithner, the US Treasury Secretary, issued his most explicit warning to date. If eurozone leaders failed to take firm action, there could be “cascading default” and bank runs, he told a meeting of the world’s finance ministers at the IMF meetings.

“The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally,” he said. “Decisions as to how to conclusively address the region’s problems cannot wait until the problem gets more severe.”

He urged governments to work alongside the European Central Bank to show an “unequivocal commitment” to ensure that countries with sound fiscal policies had affordable financing and European banks had access to sufficient capital.

UK chancellor George Osborne used his speech to the plenary session of the International Monetary and Financial Committee, the IMF’s policy committee, to hammer home his message that the eurozone needed to take action.

“In the eurozone credible political commitments will be required in the immediate period ahead,” he said. “It is clear that further action will be needed.

“The eurozone should follow the remorseless logic of monetary union through progress on institutional reform, greater fiscal integration and coordination of budget policies.”

But German finance minister Wolfgang Schaeuble said further union would have to wait until the crisis was resolved.

Speaking at the Institute of International Finance’s meetings in Washington, Schaeuble said: “It is my conviction that the strategy of piling on more debt will stunt rather than stimulate growth in the long run. You can’t fight fire with fire.”

The primary causes for the 2008 financial crisis had been excessively high levels of deficits and public debt, he insisted. “It is my conviction that you can’t cure an alcoholic by giving him more alcohol.

“You have to tackle the reasons and you have to do it at an appropriate rate. Countries with high levels of debt need to cut expenditures. Consolidation efforts must not be postponed.”

Asked why Germany was opposed to the idea of eurobonds, Schaeuble said the current lack of fiscal union made the idea untenable.

“If you make eurobonds, you destroy the instruments of sticks and carrots for fiscal discipline – so you can’t do it as long as you don’t have institutions for a common fiscal policy,” he said.

“If we did, everyone in all of the world would understand that the euro has given up the aim to be a solid and stable currency. That would be disastrous.

“I do not deny the possible risks of our strategy to solve the eurozone problems. Yet those risks are considerably lower than the risks of any alternative strategy.”

On Thursday, European Union Monetary Affairs Commissioner Olli Rehn defended eurozone policymakers’ reaction to the crisis. “There is already a strong plan in place,” he said in Washington, referring to proposals to enlarge the scope of the EFSF, which he expects to be approved and in place by mid-October.

“The enlarged EFSF, with the powers to intervene in secondary markets and to provide precautionary credit lines will be key to containing contagion,” he said.

Juergen Stark, a hawkish member of the ECB – who announced his resignation this month after the bond-buying plan was announced – issued a thinly-disguised rebuke to politicians who had criticized the eurogroup’s response. “Instead of giving advice to other regions, other governments should do their homework before they give us advice.”

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