The US and Germany sparred about how to tackle Europe's sovereign debt crisis as a meeting of officials from the world's biggest economies struggled to break an impasse over outside help for the region.
US Treasury Secretary Timothy F Geithner used a speech in Mexico City yesterday to urge Europe to step up its actions and render its crisis-fighting commitments "credible." German Finance Wolfgang Schaeuble rebuffed those calls two hours later, saying a deal struck on February 21 for a second bailout and debt write-down for Greece worth 130 billion euros ($175 billion) demonstrates that Europe is doing enough.
"I dare to say that Europe has done its homework," Schaeuble said in a speech in the Mexican capital. Tightening bond spreads in the euro region "show that we're on the right course" while budget cuts and more flexible labour markets and wages are necessary to spur economic growth and bolster the euro in the longer term, he added. "That's the only way we'll be able to restore confidence," he said.
The spat overshadowed the first of two days of G-20 talks as finance ministers and central bank governors discuss the next steps in tackling the euro-area crisis. Germany aims to rally fellow G-20 nations to find fresh money for the International Monetary Fund that could be used to help defuse the crisis.
The US's refusal to join that effort is hampering a drive to raise funds from other nations, Paulo Nogueira Batista, Brazil's representative to the Washington-based lender, said in an interview. G-20 nations including Japan and China pledged to help Europe through the IMF, as long as Europe increases its financial backstop, or firewall, to contain the crisis.
"The reluctance or skepticism of a country the size of the US is a handicap, especially if you consider that the G-20 is a consensus mechanism," Nogueira Batista said.
Also Read
Italy's 10-year bonds rose for a seventh week after agreement on the second Greek bailout, the longest run of gains in the euro-era, reducing the extra yield investors demand to hold the securities instead of German bunds by 5 basis points to 3.57 percentage points. Spanish 10-year bonds had their biggest weekly advance in a month, reducing their spread over bunds by 21 basis points.
Brazil's Finance Minister Guido Mantega, after a meeting with his counterparts from Russia India, China and South Africa -- the so-called BRICS group of major emerging markets -- sided with the US view that Europe needs to take more action. Developing nations will only contribute more funding to help Europe if the region's leaders follow "precisely to the letter" a 2010 agreement to give them a bigger say in how the IMF is run.
With positions hardening, Mexican President Felipe Calderon called an unscheduled meeting with Geithner, IMF Managing Director Christine Lagarde and Canadian Finance Minister Jim Flaherty, who said the participants would discuss G-20 issues, without elaborating.
"It's understandable that other countries want to see Europe put up their own resources first," World Bank President Robert Zoellick said in a Bloomberg Television interview in Singapore. "But I think everybody understands there is common interest in having Europe succeed."
Other topics for policy makers include growing opposition by banks and governments to the so-called Volcker rule, a proposed US regulation to prevent banks from proprietary trading, and the impact of the longest rally in oil prices in two years, G-20 officials said. Attempts to identify a successor to Zoellick, who steps down from the World Bank June 30, may also be discussed.
Europe's Stoxx 600 index slipped 0.4 percent last week on investor concern that Greece won't be able to implement the austerity measures needed for the rescue, and as the European Commission said the euro area's economy will shrink this year.
The Mexico talks set the tone for another week of policy making in Europe dictated by the debt crisis, now in its third year. Hurdles next week include parliamentary votes on Greek aid in Finland and Germany. European leaders have said they will use a summit in Brussels on March 1-2 to discuss plans to bolster the firewall, possibly by joining a permanent 500 billion euro rescue fund due to take effect in July with a temporary one known as the European Financial Stability Facility.
In Berlin yesterday, Chancellor Angela Merkel's government reiterated the opposition of Europe's largest economy to increasing the size of the permanent European Stability Mechanism, denying a report in Focus magazine that Germany may agree to fold in the remaining resources of the EFSF, creating a potential firewall of about 750 billion euros.
Canadian Finance Minister Jim Flaherty called on Germany "to take that leadership role very seriously."
Comprehensive Plan Needed
Any European actions shouldn't "lead countries hanging out there with austerity programs and negative economic growth," he told reporters in Mexico. "That's a dead end. We need to see a more comprehensive euro-zone plan for their countries."
Japan's Finance Minister Jun Azumi also stepped up pressure on Europe to show how it will end the turmoil, saying that Japan is in turn willing "to have frank discussions on the content of our contribution" for the IMF to support Europe.
"A huge amount of pressure will be put on Germany this weekend," Simon Evenett, a former World Bank official who is now a professor of international trade and economic development at the University of St Gallen in Switzerland, said in e-mailed comments. Once a vote on Greek aid passes the German parliament on February 27, "the odds are the money will be found in Berlin." 31 Angel Gurria, secretary general of the Paris-based Organization for Economic Cooperation and Development, welcomed the European Central Bank's decision to offer banks unlimited liquidity for three years, the second such cash-offering in three months.
Even so, the ECB's offer "isn't a substitute for the firewall," Gurria said in a panel discussion in Mexico City. "We still have to build the mother of all firewalls."