G7 finance ministers are backing a greater "fiscal and financial union" as the best way to tackle the debt crisis threatening the single currency.
The British chancellor, George Osborne, and other finance ministers from the Group of Seven group of industrialised nations and central bankers discussed the growing pressure on Europe in a telephone conference on Tuesday in what British officials described as a “stocktaking session” ahead of the G20 summit in Mexico on June 18-19.
David Cameron flies to Berlin later this week for talks, where he will tell the German chancellor, Angela Merkel, that Britain will support greater fiscal governance in the eurozone.
Finance ministers, fearful that the crisis could derail the global economy, are keen to find swift solutions as the Spanish Prime Minister Mariano Rajoy warned that his country was now facing “extreme difficulty”.
Earlier, Rajoy’s treasury minister, Cristóbal Montoro, admitted that Spain was effectively shut out of the bond market, unable to raise cash, because of the high interest rates demanded by investors.
G7 finance ministers made clear that the EU’s ongoing crisis will dominate next week’s G20 summit. Michael Froman, a senior economic adviser to the US president, Barack Obama, said: “The eurozone crisis is the most significant threat to growth.”
A statement issued by the US treasury, which chairs the finance chiefs’ group, said: “The G7 ministers and governors reviewed developments in the global economy and financial markets and the policy response under consideration, including the progress towards financial and fiscal union in Europe. They agreed to monitor developments closely ahead of the G20 summit in Los Cabos [in Mexico].”
The statement was issued after the Guardian reported that European leaders were drawing up a new blueprint for what is described as a federalised eurozone.
The new French government and the European commission have voiced strong support for a new eurozone “banking union” to save the single currency but the French might balk at having to surrender sovereignty over their budgets and fiscal policies.
The EU’s four key players – the European council president, the European commission president, the president of the European Central Bank and the head of the 17-strong eurozone finance ministers – are due to present proposals to an EU summit at the end of the month.
The British prime minister will tell Merkel in Berlin on Thursday that Britain would welcome moves towards fiscal governance in the eurozone. Downing Street believes that the survival of the euro is vital to the British national interest and that a single currency can only succeed if it co-ordinates monetary and fiscal policy.
But Britain will not be writing any blank cheques, as Cameron showed when he vetoed a proposed amendment to the Lisbon treaty last December that would have embedded the new eurozone fiscal compact within the architecture of the EU. This meant that France and Germany had to take the lead in drawing up a parallel treaty.
The prime minister may find himself in the slightly curious position of encouraging Merkel to take steps towards greater pooling of eurozone sovereignty that she currently finds unacceptable.
Cameron believes, for example, the eurozone should give serious consideration to eurobonds – jointly issued bonds which would enable debt-laden countries to benefit from the strong financial position, and lower borrowing costs, of Germany.
Britain does not currently detect any moves in Berlin towards accepting eurobonds. Ministers do detect interest in Berlin to using the European financial stability facility to support European banks. That would involve the eurozone countries jointly guaranteeing savers’ bank deposits.
One British official said: “The German position is evolving. It is not shifting dramatically.”
Finance ministers were keen to touch base ahead of the G20 summit after the recent weak job figures in the US and the weak growth figures in China. Rajoy told the Spanish senate that Europe must underline the “irreversibility” of the euro by agreeing a common banking union and backing eurozone bonds.
Montoro and Rajoy are determined to avoid a full-scale bailout, because of the tough conditions that would be attached to the funds, but instead want the eurozone to inject cash into its banks – which is not allowed under current rules.
Jeremy Cook of foreign currency trading group World First, said Spain should apply for a formal bailout: “Although politically destructive and obviously humiliating, it is time for Spain to ask for help from the IMF.” Economists at US bank JP Morgan estimated on Tuesday that Spain might require a bailout of €350-billion, of which €75-billion needs to be pumped into its struggling banking sector. – © Guardian News and Media 2012