G7 leaders planned a conference call Tuesday ahead of a scheduled mid-June summit meeting to discuss the eurozone debt crisis, after a weekend warning by billionaire George Soros that Europe had just three months to salvage the euro. Spain finally called for outside funding, saying that ever-rising interest rates are shutting the door to world markets. Adding to the gloom, manufacturing and services output declined for the fourth month in a row in a purchasing managers’ survey.
Bloomberg reported Tuesday that finance ministers and central bank governors from the G7 countries intended to talk about the ongoing crisis, with Finance Minister Jun Azumi of Japan quoted saying they were “concerned about the unstable situation in the current global economy and we need to share these concerns.” The call comes before a G20 summit meeting set for June 18-19.
Market concerns have been rising over a possible Greek exit from the euro and pending fallout from the Spanish banking crisis. Eurozone leaders have been unable to come to any agreement on actions that could resolve the situation, with Germany opposing closer financial ties with eurozone members such as joint euro area bonds.
However, Chancellor Angela Merkel of Germany said on Monday night that systemic banks might need supervision at the European level, and on Tuesday Wolfgang Schaeuble, Germany’s finance minister, added that the country was open to closer European coordination to resolve the crisis.
In remarks before a meeting with European Commission (EC) head Jose Barroso, Merkel said that ratification of the new fiscal pact, which makes debt and deficit limits binding on member countries, “is one step, but it’s not yet sufficient. So we will also talk about to what degree one has to bring the systemic banks under specific European supervision to keep national interests from playing too large a role.”
The billionaire George Soros (left) had said over the weekend that Europe has but three months to resolve the crisis and save the euro, saying in an AFP report, “In my judgment, the authorities have a three months’ window during which they could correct their mistakes and reverse the current trends.” He was specifically critical of Germany’s role, and that of the Bundesbank, in the current impasse—as well as Germany’s stance on austerity as other nations swing toward growth.
He was quoted saying, “In a crisis, the creditors are in the driver’s seat and nothing can be done without German support,” adding that public opposition to austerity in the eurozone “is likely to grow until the policy is reversed.”
Regarding austerity, he said, “The authorities didn’t understand the nature of the euro crisis; they thought it is a fiscal problem while it is more of a banking problem and a problem of competitiveness. And they applied the wrong remedy: you cannot reduce the debt burden by shrinking the economy, [but] only by growing your way out of it.” While Soros expects that voters have been sufficiently frightened of a euro exit that Greece’s next election will support its rescue package, if narrowly, he added that the eurozone “crisis is liable to come to a climax in the fall” with a weaker German economy that will make it even more difficult for Merkel to persuade an already reluctant “German public to accept any additional European responsibilities.”
Spain’s budget minister, Cristobal Montoro, broke with Prime Minister Mariano Rajoy on Tuesday as he called for outside funding to help the country weather its banking crisis. Montoro does not see the need for a full-scale rescue, but instead said that Spanish banks don’t need an “excessive” amount of funds to recapitalize. Where that money will come from is the question, he said, adding, “That’s why it’s so important that the European institutions open up and help us achieve, help facilitate, that figure because we’re not talking about astronomical figures.”
Spain is facing difficulties on the world’s credit markets, said Montoro in a Reuters report, adding that at current rates, financial markets were pretty much closed to the country. He was quoted saying, “The risk premium says Spain doesn’t have the market door open. The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt.” Montoro also said that European mechanisms should be used to recapitalize Spanish banks.
It was not likely, however, that the G7 conference call on Tuesday would result in concrete action, more probably waiting to see the outcome of the Greek election and the upcoming European Union summit set for June 28-29 before committing to any strategy. One unidentified G7 source said there was only a very small chance the G7 would go as far as to pledge coordinated action to curb excessive currency volatility.
Meanwhile, according to Markit Economics, eurozone services and manufacturing output contracted in May at their fastest pace in nearly three years. A composite index of both came in at 46, down from April’s level of 46.7. While it is still above an early estimate of 45.9, it is at its lowest since June of 2009. It has been contracting for four straight months.
The data indicate “markedly contracting activity and further weakness ahead,” according to Howard Archer, chief European economist at IHS Global Insight in London, who said in the report, “It is odds-on that the eurozone is headed for renewed and appreciable contraction in the second quarter.”