Poehl Says German Bailout of Euro Region Opens Pandora’s Box

By Brian Swint

Feb. 27 (Bloomberg) -- Former Bundesbank President Karl Otto Poehl said Germany should resist increasing pressure to rescue other euro-area countries as the financial crisis brings some of them to the brink of default.

“A bailout of a debtor country from a surplus country like Germany would be like opening the box of Pandora,” he said yesterday at an event at the London School of Economics. “It’s a very dangerous course that we will enter” and “I’m very much against it, many people in Germany are against it, but the political pressure will increase, it’s obvious.”

German Finance Minister Peer Steinbrueck signaled his government’s openness to rescues when he said last week that some euro nations are “getting into difficulties” and that Europe’s biggest economy would show its “ability to act.” Poehl said that the International Monetary Fund should seek to intervene instead.

“The IMF was designed for this purpose,” he said. “But the problem is that the IMF has not enough money. They need an increase in capital, that’s the most urgent reform we need.”

Government leaders of the Group of 20 should agree to “double or triple” the IMF’s capital to fight the crisis and help out euro-region members or European countries such as Ukraine, which is “close to bankruptcy,” Poehl said.

Poehl, 79, said earlier yesterday on Sky News that smaller members of the euro region are more likely to default. German policy makers argued for years that the Maastricht Treaty that set up the single currency forbids bailouts.

That countries may agree to rescue a euro-area member from bankruptcy “can be the outcome of the negotiations, because it has political aspects,” Poehl said. “There are some signs that make me worry.”

He also said that the global economic slump will push down the value of the U.S. dollar.

“One consequence of the worldwide recession will likely be the decline of the dollar as a reserve currency,” he said. “The dollar will get under pressure again.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.