‘Barrier’ Around Greece Needed: Merkel

By Tony Czuczka - Sep 26, 2011 5:01 AM GMT+0700

German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area.

Expanding the powers of the region’s rescue fund, the European Financial Stability Facility, as agreed by European leaders in July is necessary to avoid Greece’s problems from spilling over to other countries, Merkel said late yesterday on ARD television. The fund’s permanent successor, due to take effect in mid-2013, is needed “so we can in fact let a state go insolvent” if it can’t pay its bills.

“We have to be in a position to react,” Merkel said. “We have to be able to put up a barrier.” Even so, “I don’t rule out at all that at some point we will have the question whether one can do an insolvency of states just like with banks.” She made no mention of setting up the permanent fund before 2013.

Merkel, as the head of Europe’s biggest economy, is at the center of calls by the U.S. and other governments to do more to stop the European sovereign debt crisis as it pounds global financial markets. The situation is “serious” and “there are no easy solutions,” Merkel said in the hour-long interview. She also indicated that she’s being treated for high blood pressure.

‘A Bit Earlier’

Policy makers can make the EFSF more “efficient” by leveraging it without involving the European Central Bank, Finance Minister Wolfgang Schaeuble said over the weekend. He also raised the prospect of bringing in the permanent backstop before 2013. Senior finance officials are preparing to examine the cost advantages of accelerating the start of the fund by a year to 2012, according to a document prepared for meetings this week obtained by Bloomberg News.

“Maybe we can manage it a bit earlier” than 2013, Schaeuble told reporters in Washington on Sept. 24 after the annual meeting of the International Monetary Fund. The current facility is a “preliminary solution and we want a permanent solution as quickly as possible.” Its successor, known as the European Stability Mechanism, will have a “quite different lasting, stabilizing, confidence-creating function” and Germany “would not oppose” bringing it forward, he said.

With global stocks entering their first bear market in two years last week, European policy makers were met with pressure at the weekend from foreign counterparts at the IMF meeting to do more to stop the contagion seeping from Greece.

‘Can’t Force It’

Merkel rejected Greece leaving the euro area, saying that “we can’t force it, but I don’t believe in that in any case” because it would send a signal to financial markets that attacks on euro-area sovereigns can succeed.

“Maybe Greece leaves, the next country leaves and then the next country after that,” she said. “They would speculate against all the countries.” A small group of euro countries would be left at the end, deprived of the euro’s advantage as the currency appreciates, she said.

Merkel suggested that Greece may be able to get the next tranche of bailout aid, after a team of officials from the IMF, the ECB and the European Commission assess the Greek government’s progress in meeting deficit-reduction and other targets. Merkel is due to host Greek Prime Minister George Papandreou for talks in Berlin on Sept. 27, two days before German lawmakers vote on the enhanced rescue fund.

It’s the “troika’s” job to make the ruling on progress made by Greece, she said. “Were they to come back one day and say Greece can’t make it, then we would have to rethink,” Merkel said. “But they aren’t doing that so far.”

EFSF Vote

Merkel said she’ll win legislative approval of the expanded EFSF powers on Sept. 29 on the strength of her governing majority without depending on opposition support. “I want a majority of my own and I’m confident I will get it,” she said. “I’m also going to lobby for it one more time this week.”

For all the turmoil, Germans can have confidence in the euro. “We need the euro,” she said. “The euro is good for us. That is why we need to improve on what has gone wrong in the past.” Changing European treaties to make it easier to enforce budget discipline is one solution, she said. “We have to work toward treaty change.”

To contact the reporter on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net