Italy’s Prime Minister Mario Monti warned that Spain could reignite the European debt crisis as euro-area ministers this week prepare a deal to strengthen the region’s financial firewall.
Monti pointed to Spain’s struggle to control its finances ahead of a finance ministers meeting in Copenhagen starting on March 30, where officials will seek agreement to raise a €500 billion ($664 billion) ceiling on bailout funding.
“It doesn’t take much to recreate risks of contagion,” Monti said during the weekend at a conference in Cernobbio, Italy. Days after his Cabinet approved a bill to overhaul Italy’s labour laws, Monti praised Spain’s efforts to loosen work regulations while advising it to focus on cutting the national budget. Spain “hasn’t paid enough attention to its public accounts,” he said.
The euro crisis has eased after the European Central Bank last month boosted liquidity through three-year loans to banks, while European Union leaders this month sealed a second Greek bailout package. Italian and German confidence indexes rose yesterday as Spanish and Italian bonds gained.
Germany is open to temporarily boosting the eurozone’s financial firewall to €700 billion ($930 billion), Chancellor Angela Merkel said on Monday, setting the stage for tough talks in which some governments will push for an even bigger increase to protect Italy and Spain.
Merkel’s statement is a turnaround from Germany, which has so far insisted there was no need to increase the lending capacity of the bailout funds beyond the planned €500 billion, despite uncertainty over the ability of Rome and Madrid to repay their debts. However, it is questionable whether a temporary increase to €700 billion — of which some €200 billion have already been committed to previous bailouts — will be enough to convince the rest of the world that the eurozone is doing enough to stop its debt crisis from spreading.
The 17 euro countries are currently debating how to move from their old bailout fund — the €440 billion European Financial Stability Facility, which is already providing some €200 billion in loans to Greece, Ireland and Portugal — to a new, permanent rescue fund — the €500 billion European Stability Mechanism.
The ESM is set to come into force in July, but under current policy old bailouts would have to be subtracted from its overall capacity, meaning that it could give only some €300 billion in new loans. That is seen as way too little to effectively help large economies like Italy and Spain, which together have more than €2.5 trillion in debts.
On Monday, Merkel said her government was open to let the €200 billion in existing commitments run in parallel to the ESM, which would raise the overall capacity to some €700 billion until the old loans have been paid back.