Friday 27 January

This session was on the record and open to reporting press.

How will the Eurozone economies emerge from the euro crisis?

Key Points

• The European Union is on the verge of concluding an important fiscal convergence compact.
• Greece is nearing a debt-restructuring deal and is unlikely to default.
• Disagreements remain among EU countries on proposed crisis remedies such as Eurobonds and firewalls to deter panic.
• Liquidity is not a cure for Europe’s ills; countries will have to address the lack of fiscal discipline and competitiveness deficiencies.

Synopsis

European finance and economics ministers hailed the imminent agreement on closer fiscal convergence in Europe as a major step to restore confidence in their distressed economies. “We need a fiscal compact and we are revamping the economic structure of Europe,” said Olli Rehn, Vice-President, Economic and Monetary Affairs, European Commission, Brussels. “Prevention is the name of the game and we want to prevent fiscal crisis and external imbalances that have happened in the past year with tremendous human cost.” Added Luis de Guindos Jurado, Minister of Economic Affairs and Competitiveness of Spain: “The vital element to restore confidence is the institutional framework we will put in place and the commitment of the countries. We have complete consensus that in the future we are going to avoid the problems that we had in the past.”

The ministers, however, acknowledged that disagreement remains on some of the measures proposed to address the debt crisis. On the issue of Eurobonds, the difficulty is that Europe must first create an appropriate structure for fiscal union, Wolfgang Schäuble, Federal Minister of Finance of Germany, pointed out. Eurobonds are often regarded as something of a “philosopher’s stone” that could solve the crisis, François Baroin, Minister of Economy, Finance and Industry of France, said. Fiscal convergence is necessary first, he agreed.

Also in dispute is the need for firewalls to prevent the spread of panic in the event that the debt crisis spins out of control. Notably, the launch of the European Stability Mechanism has been brought forward by six months to July 2012. Europe will need the support of the United States, the United Kingdom and other countries to boost the resources of the International Monetary Fund, Rehn said. While some in Europe are calling for very “high” firewalls to deter panic, others including Germany have rejected the idea, insisting that the focus should be on addressing the real problems of Europe, including the lack of fiscal discipline and the competitiveness deficiencies in certain economies.

To be sure, some of the distressed European economies are making progress in fiscal consolidation and structural reforms. “We have a wave of reforms going on in Europe,” Rehn asserted. “This is no time for Cassandras but a time to further build confidence.”

The finance and economics ministers were upbeat about the prospects of concluding a debt-restructuring arrangement for Greece. Schäuble told participants that he is “quite optimistic” about a deal and does not expect Greece to default. The outlook is also positive for Spain and Italy, he reckoned. Rehn agreed that an agreement on Greece is “very close”.

Baroin welcomed efforts by the European Central Bank (ECB) to combat the crisis by providing unlimited funds to Eurozone lenders. “The ECB is considered independent,” Baroin stressed. “The unlimited liquidity for banks for three years has significantly reduced tensions in the European banking system and will be an important step to help confidence to return.” Looking ahead, he concluded, “we now have to think together about how we can support growth.” Guindos Jurado agreed: “Liquidity is not the final cure to the problems we have; it is a helping hand but not a final cure. We have to put our houses in order. We have to bring to the fore the agenda of growth and employment.”

Other Key Takeaways

Asked by a Euro-MP about the lack of EU-wide agreement on debt reduction and common deficit targets, Schäuble suggested that she call David Cameron, Prime Minister of the United Kingdom. Britain has refused to join the EU fiscal pact, leading some members to draft a separate agreement outside the Union’s framework. “I would like to give you the mobile phone number of David Cameron,” said Schäuble. “It would be much better for everyone outside of Europe to understand if we were to do what we will now have to do in our fiscal compact in the framework of European treaties. But that has to be done by unanimous decision.”

Both Baroin and Schäuble underscored the importance of solidarity between France and Germany in their approach to resolving the debt crisis.

Guindos Jurado told participants that Spain, where unemployment had reached about 23% and youth unemployment is about twice that rate, is taking a “two-pillar” approach to the crisis. It is focusing on banking sector restructuring and the reform of the labour market.

Disclosures

This summary was written by Alejandro Reyes. The views expressed are those of certain participants in the discussion and do not necessarily reflect the views of all participants or of the World Economic Forum.

Copyright 2012 World Economic Forum

This material may be copied, photocopied, duplicated and shared, provided that it is clearly attributed to the World Economic Forum. This material may not be used for commercial purposes.

Keywords: World Economic Forum Annual Meeting 2012, Davos, Klaus Schwab, great transformations, new models, economics, Europe, growth and employment models, competitiveness

Contributors

François Baroin, Minister of Economy, Finance and Industry of France
Luis de Guindos Jurado, Minister of Economic Affairs and Competitiveness of Spain
Olli Rehn, Vice-President, Economic and Monetary Affairs, European Commission, Brussels
Wolfgang Schäuble, Federal Minister of Finance of Germany

Moderated by

Maria Bartiromo, Anchor, Closing Bell, and Anchor and Managing Editor, Wall Street Journal Report, CNBC, USA