German Chancellor Angela Merkel said that European efforts to resolve the debt crisis are making progress, even as "imbalances" in euro-area economies show that the task is far from complete.
"We've come a good way along the mountain path, but we're not completely over the mountain," Merkel told reporters in Rome late yesterday after talks with Italian Prime Minister Mario Monti. "I suspect that in the next few years there will continue to be new mountains — there won't be a celebratory event in which we say we're over the mountain and now we can sit among the trees and say that we've done it."
Merkel praised Monti's "bold" efforts since taking office on Nov. 16 to overhaul Italy's economy, which include 20 billion euros in austerity measures and steps to deregulate services amid surging Italian bond yields that threatened to rip apart the currency region. Aided by European Central Bank liquidity measures, Italian 10-year borrowing costs have fallen to 4.89 percent from a euro-era record of 7.26 percent on Nov. 25.
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Monti, a former European Union competition commissioner, said Italy has "arrested" the crisis though not yet overcome it. "Italy still has homework to do," he said. Italy prefers to rely on its "own strengths" rather than seek any external aid during the worst moments of the crisis.
Monti reiterated Italy's support for "adequate" financial firewalls for the region. Euro-area finance ministers meeting in Brussels two days ago asked the European Commission, which has backed the largest possible rescue pool for distressed member states, to propose options on the region's firewall before a decision at a March 30-31 meeting in Copenhagen.
Merkel, asked about boosting the region's crisis-fighting war chest, declined to comment. Her Cabinet is due to take up a bill in Berlin today that authorizes her government to help set up the permanent rescue fund, the European Stability Mechanism, known as the ESM. Even so, Germany is the biggest holdout on plans to lift a 500 billion-euro ($655 billion) ceiling on bailout lending.
Euro states must avoid "creating wrong incentives that would prompt some to believe that they can get by without determination to solve their problems," Finance Minister Wolfgang Schaeuble said in Brussels yesterday.
Led by the U.S., major world powers have held back on increasing the International Monetary Fund's crisis-fighting resources until the 17-nation euro area provides more self-help in the form of a bolstered firewall. Schaeuble said there's a "certain link" between the decision on the ESM to be taken by euro finance ministers at the end of March and a bigger role for the IMF.
ESM Capacity
Europe plans to equip the ESM with 80 billion euros in cash and give it the right to call another 620 billion euros in an emergency. The total would enable it to lend 500 billion euros and maintain a buffer to garner an AAA credit rating when it is set up in July. Germany has been the main holdout against proposals to let the ESM tap the remaining 250 billion euros in the temporary fund, the European Financial Stability Facility.
"We would like to see some combining of the resources," French Finance Minister Francois Baroin said in Brussels. "We are confident we will see some advances in the next fortnight."
In Rome, Merkel said that "huge risks" lie ahead. "We have these imbalances — what we're referring to as the Target2 balances — they are one of many indicators that we're not back in full balance," she said.
She and Monti said they shared the same position on a possible financial-transaction tax, saying it should be applied to all EU countries. They also said they agreed that Europe must start to focus more on economic expansion, with Merkel saying that an EU summit in June will focus on growth.
Monti, asked about the possibility that he could take over from Luxembourg Prime Minister Jean-Claude Juncker as head of the group of euro finance ministers, suggested he was too busy. "Do you think an Italian prime minister has time for other jobs?" he said.
Bloomberg News
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