Euro Leaders Hail Accord as Bundesbank Cools

By Patrick Donahue - Dec 12, 2011 12:15 AM GMT+0700

European leaders pressed the case that a new fiscal accord will deliver the region from its two- year debt crisis, as Germany’s top central banker cooled speculation the European Central Bank will extend its role.

The post-crisis single currency will be “more robust” following the Dec. 9 agreement to strengthen budget rules, Finland’s Prime Minister Jyrki Katainen told YLE Radio Suomi. Bundesbank President Jens Weidmann told the Frankfurter Allgemeine Sonntagszeitung that while the new accord represents progress, the onus is on governments rather than the Frankfurt- based ECB to resolve the crisis with financial backing.

“The mandate for redistributing taxpayer money among member states clearly does not lie in monetary policy,” Weidmann told the newspaper in an interview published today. “Financing of sovereign debt through central banks is and remains forbidden by treaty.”

The Franco-German-led agreement, which provides tighter budget rules and an additional 200 billion euros ($267 billion) to the euro warchest, is part of an effort to reassure investors that European leaders are able to master the crisis. ECB President Mario Draghi lauded the accord, stoking hopes among investors that the central bank might step up bond purchases.

Chancellor Angela Merkel said the accord set the region on a path to a “lastingly stable euro” after European leaders convened in Brussels, adding that “the breakthrough to a stable union has been achieved.” The U.K. decided to remain outside the new framework.

Mixed Response

Investors gave a mixed reaction before the weekend. European stocks rose, while the euro pared gains on speculation that national authorities will struggle to implement the agreement. Yields on Italy’s 10-year notes rose 8 basis points to 6.53 percent, while Spain’s gained 3 basis points to 5.85 percent.

The accord opens the way for the ECB to intensify its role in the crisis, Irish Deputy Prime Minister Eamon Gilmore said in an interview with Dublin-based broadcaster RTE. He also said the country could hold a referendum on the new pact if needed, once the final text of the new rules was agreed.

“If in certain circumstances that requires a referendum, then we’ll we have a referendum,” Gilmore said.

The British Prime Minister David Cameron’s refusal to back the effort opened a rift in the 27-member block, leaving the leaders of the single-currency union to fashion an accord among each other rather than amending the EU treaties. Nine of the other 10 non-euro members signaled they’ll go along with the pact after consulting their parliaments.

‘Isolated and Marginalized’

U.K. Deputy Prime Minister Nick Clegg, speaking on British Broadcasting Corp.’s “Marr” program today, said he was “bitterly disappointed” by the summit result, which left the U.K. “isolated and marginalized within the European Union.” Still, the leader of Britain’s smaller coalition party, the pro- EU Liberal Democrats, ruled out a breakup of Britain’s ruling coalition.

Leaders for the first time extracted a contribution from euro central banks of 150 billion euros toward the International Monetary Fund’s general resources. Another 50 billion euros will come from non-euro EU states. The accord’s signatories will confirm within 10 days how they will channel funds to the IMF, which could then be used to aid troubled European states.

Chinese Vice Foreign Minister Fu Ying said that China will be part of international efforts to assist Europe.

‘Very Good Outcome’

“Europe needs a partner, they come to sell their bonds, that’s a partnership,” Fu, whose portfolio is European affairs, told reporters in Vienna yesterday. “They have to work out the terms, it should be a kind of relationship of cooperation.”

Europe will complete the language of the new rulebook by March and will reassess plans to cap the overall lending of the permanent rescue facility, the European Stability Mechanism, at 500 billion euros. They brought forward the operation of the fund to next year.

Draghi praised a “very good outcome” in Brussels, a day after he dampened expectations that a deal would prompt the ECB to step up its bond-buying activities. Europe’s top central banker said the European bailout fund had to provide the firewall.

Austrian Chancellor Werner Faymann cast doubt on the arrangement, telling the Salzburger Nachrichten newspaper that the accord struck in Brussels lacked “firepower.”

“The decisions don’t have enough firepower to have a sustainable effect,” Faymann told the Salzburg-based paper. While the measures on budget discipline are a “big step forward,” rules on regulating financial markets, a European rating company and “European income via a financial transaction tax” are still missing, he said.

To contact the reporter on this story: Patrick Donahue in Berlin at at pdonahue1@bloomberg.net.

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