Traverse City Record-Eagle

Business

July 31, 2012

Teamwork 'key' to crisis

U.S., Germany call for cooperation to end euro debt fiasco

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BERLIN — U.S. Treasury Secretary Timothy Geithner and his German counterpart stressed the need for coordinated action Monday in the face of the eurozone debt crisis and faltering global growth, but left open what joint steps Europe and the United States would take to shore up the world economy in the coming months.

Geithner traveled to the German North Sea island of Sylt for informal talks with Finance Minister Wolfgang Schaeuble, before heading on to meet Mario Draghi, the president of the European Central Bank, later Monday.

Geithner and Schaeuble praised efforts by Ireland, Portugal, Spain and Italy to turn their debt-ridden economies around, and voiced optimism about economic reforms meant to deepen integration among the 17 eurozone members.

The joint statement made no reference to Greece, which has struggled to implement the reform package agreed with its creditors. The country faces the possibility a chaotic exit from the common currency area if it fails to meet its bailout conditions.

Geithner and Schaeuble "emphasized the need for ongoing international cooperation and coordination" and stated that the U.S. and Germany would "continue to cooperate closely with their partners when advancing the policy agenda in autumn to further stabilize global and European economies." The U.S. treasury secretary was later scheduled to head to Frankfurt for a meeting with ECB President Mario Draghi.

Markets surged after Draghi said last Thursday that the ECB would do "whatever it takes" to preserve the euro. Over the following days, the leaders of Germany, France and Italy also said they would do all they can to protect the 17-country currency union — comments that Geithner and Schaeuble's "took note of," according to their statement.

Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, said the joint Geithner-Schaeuble statement did not offer any new solutions for the European debt crisis.

"The statement doesn't contain anything new," Sohn said. "What is important is not the joint statement but what the two officials might have discussed behind the scenes." Sohn said that it was very likely that Geithner sought during his one-day visit to Europe to strongly encourage the Europeans to move more aggressively to deal with their debt problems.

"The U.S. economy is getting worse and the main drag on our economy right now is coming from Europe," Sohn said. "Geithner is trying to get the Europeans to move in the right direction." Sohn said, "This is an election year and the Obama administration really can't do much at home to boost the economy given all the constraints at the moment." Also Monday, Geithner had a phone conversation on the European financial crisis with France's finance minister Pierre Moscovici. A statement issued by Geitner's department said the call covered "ongoing efforts to ensure financial stability, foster greater economic integration and promote the recovery of the eurozone." Though the European leaders didn't pledge any specific action, the comments raised expectations that the ECB might step in to buy Spanish and perhaps Italian government bonds to lower the countries' borrowing costs, which have been worryingly high in recent weeks. Another possibility might be for the eurozone's temporary rescue fund, the European Financial Stability Facility, to buy bonds.

In an interview with Monday's edition of the German daily Sueddeutsche Zeitung, Jean-Claude Juncker — the Luxembourg prime minister who chairs meetings of the eurozone finance ministers, or eurogroup — said that officials have no time to lose and will decide in the coming days what measures to take.

Juncker said the rescue fund and eurozone countries would coordinate with the"and we will, as Draghi says, see results." But he also said: "It still has to be decided what exactly we will do when. That depends on the developments of the coming days and how fast we have to react." Asked what exactly was meant by German Chancellor Angela Merkel's joint statements with her French and Italian counterparts, German government spokesman Georg Streiter said Monday: "It is the intention of all simply to send a very strong signal for the euro." He also highlighted Juncker's comment that what will be done — and when — still has to be decided.

Streiter didn't talk about any specific action, other than to make clear that Germany still opposes any move to pool government debt, for example through jointly issued eurobonds.

Previous bond purchases by the ECB haven't been popular in Germany, where some worry that they go beyond the central bank's mandate. Without commenting directly on the possibility, Streiter said that "the German government has full confidence in the ECB."

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