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EUROPEAN UNION

Bond market jitters misplaced, Germany says

Germany was among the EU heavyweights that issued a joint declaration Friday insisting that bond market jitters over a future bailout fund are misplaced as Ireland suffers a debt crisis.

Bond market jitters misplaced, Germany says
Photo: DPA

“Any new (bailout) mechanism would only come into effect after mid-2013 with no impact whatsoever on the current arrangements,” finance ministers from Britain, France, Germany, Italy and Spain said in the declaration, issued at a G20 summit in Seoul.

Germany is backing a plan to force private investors to bear a share of bailout costs for countries facing fiscal ruin.

But German Finance Minister Wolfgang Schäuble stressed Friday this would only take effect in three years, and was not to blame for the rise in interest yields on Irish government bonds to record levels.

He said investors were guilty of a “total misunderstanding.”

“It has to do with decisions from the European Council (EU leaders), and it’s a total misassessment of the issues at hand…. It has absolutely nothing to do with any current discussion, and you can’t get them mixed up,” he added.

Ireland’s cost of borrowing hit record highs on Thursday. Ten-year government bond yields jumped to 8.929 percent, the highest level since the euro was created in 1999, placing Europe’s bond markets under serious strain.

The leap fuelled fears that the eurozone debt and deficit crisis could be entering a dangerous second phase just six months after a massive bailout of Greece, to which Germany was the biggest contributor.

Portuguese bond yields also hit historic peaks on Thursday.

German Chancellor Angela Merkel said Thursday that European taxpayers should not pay the whole cost of rescuing debt-laden countries.

“Let me put it simply – there may be a contradiction between the interests of the financial world and those of the political world,” she said at a G20 business summit in Seoul.

“We cannot explain to our voters and citizens why taxpayers must finance certain risks, and not those who made a great deal of money taking those risks.”

Under Merkel’s proposals, future rescue packages would only be launched if government bondholders agree to bear some losses.

EU leaders agreed last month to design a permanent plan of aid and penalties for eurozone countries facing fiscal ruin, to take over after the lifespan of a current crisis response fund ends in 2013.

But the European ministers stressed Friday that “the EFSF (European Financial Stability Fund) is already established and its activation does not require private-sector involvement,” adding that the new system from 2013 “could include a range of possibilities.”

“Whatever the debate within the euro area about the future permanent crisis resolution mechanism, and the potential for private sector involvement in that mechanism, we are clear that this does not apply to any outstanding debt and any programme under current instruments,” they said.

European Commission president Jose Manuel Barroso said Thursday that the European Union was prepared to stand by Ireland.

“What is important to know is that we have all the necessary instruments in place now to support Ireland if necessary,” said Barroso.

Irish bond yields – the rate of return paid to investors holding the government debt instruments – have soared in the face of mounting investor unease at the stretched public finances. Later this month, Finance Minister Brian Lenihan will unveil a four-year programme of austerity measures that will involve a €15-billion correction to rein in the huge public deficit, ahead of the annual budget in December.

AFP/ka

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EUROPEAN UNION

The Euro celebrates its 20th anniversary

The euro on Saturday marked 20 years since people began to use the single European currency, overcoming initial doubts, price concerns and a debt crisis to spread across the region.

The Euro celebrates its 20th anniversary
The Euro is projected onto the walls of the European Central Bank in Brussels. Photo: Daniel Rolund/AFP

European Commission chief Ursula von der Leyen called the euro “a true symbol for the strength of Europe” while European Central Bank President Christine Lagarde described it as “a beacon of stability and solidity around the world”.

Euro banknotes and coins came into circulation in 12 countries on January 1, 2002, greeted by a mix of enthusiasm and scepticism from citizens who had to trade in their Deutsche marks, French francs, pesetas and liras.

The euro is now used by 340 million people in 19 nations, from Ireland to Germany to Slovakia. Bulgaria, Croatia and Romania are next in line to join the eurozone — though people are divided over the benefits of abandoning their national currencies.

European Council President Charles Michel argued it was necessary to leverage the euro to back up the EU’s goals of fighting climate change and leading on digital innovation. He added that it was “vital” work on a banking union and a capital markets
union be completed.

The idea of creating the euro first emerged in the 1970s as a way to deepen European integration, make trade simpler between member nations and give the continent a currency to compete with the mighty US dollar.

Officials credit the euro with helping Europe avoid economic catastrophe during the coronavirus pandemic.

“Clearly, Europe and the euro have become inseparable,” Lagarde wrote in a blog post. “For young Europeans… it must be almost impossible to imagine Europe without it.”

In the euro’s initial days, consumers were concerned it caused prices to rise as countries converted to the new currency. Though some products — such as coffee at cafes — slightly increased as businesses rounded up their conversions, official statistics have shown that the euro has brought more stable inflation.

Dearer goods have not increased in price, and even dropped in some cases. Nevertheless, the belief that the euro has made everything more expensive persists.

New look

The red, blue and orange banknotes were designed to look the same everywhere, with illustrations of generic Gothic, Romanesque and Renaissance architecture to ensure no country was represented over the others.

In December, the ECB said the bills were ready for a makeover, announcing a design and consultation process with help from the public. A decision is expected in 2024.

“After 20 years, it’s time to review the look of our banknotes to make them more relatable to Europeans of all ages and backgrounds,” Lagarde said.

Euro banknotes are “here to stay”, she said, although the ECB is also considering creating a digital euro in step with other central banks around the globe.

While the dollar still reigns supreme across the globe, the euro is now the world’s second most-used currency, accounting for 20 percent of global foreign exchange reserves compared to 60 percent for the US greenback.

Von der Leyen, in a video statement, said: “We are the biggest player in the world trade and nearly half of this trade takes place in euros.”

‘Valuable lessons’

The eurozone faced an existential threat a decade ago when it was rocked by a debt crisis that began in Greece and spread to other countries. Greece, Ireland, Portugal, Spain and Cyprus were saved through bailouts in return for austerity measures, and the euro stepped back from the brink.

Members of the Eurogroup of finance ministers said in a joint article they learned “valuable lessons” from that experience that enabled their euro-using nations to swiftly respond to fall-out from the coronavirus pandemic.

As the Covid crisis savaged economies, EU countries rolled out huge stimulus programmes while the ECB deployed a huge bond-buying scheme to keep borrowing costs low.

Yanis Varoufakis, now leader of the DiEM 25 party who resigned as Greek finance minister during the debt crisis, remains a sharp critic of the euro. Varoufakis told the Democracy in Europe Movement 25 website that the euro may seem to make sense in calm periods because borrowing costs are lower and there are no exchange rates.

But retaining a nation’s currency is like “automobile assurance,” he said, as people do not know its value until there is a road accident. In fact, he charged, the euro increases the risk of having an accident.

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