Finland’s prime minister supported a Dutch proposal to create a European commissioner for fiscal discipline on Monday and warned that Europe may have mere “weeks” left to convince markets that it can combat its spiraling debt crisis.
Prime Ministers Jyrki Katainen and Mark Rutte rejected international calls for an expansion of Europe’s bailout facility however, stressing that profligate euro nations in the periphery should enforce budget discipline according to existing treaty obligations.
The 1997 Stability and Growth Pact enforces an annual budget deficit no higher than 3 percent of gross domestic product and a public debt that’s lower than 60 percent of GDP. Finland and the Netherlands are on target to meet these fiscal norms although the Dutch national debt exceeds the maximum by several points.
The two leaders echoed a concern that was expressed by the American treasury secretary Timothy Geithner this weekend who said to fear “cascading default, bank runs and catastrophic risk” if Europe failed to resolve the Greek debt crisis.
Katainen told Dutch television that he was “worried about the liquidity of finance markets” as well. “There are lots of good and strong banks in Europe who can suffer from the uncertainty in the eurozone,” he said before recommending that all members of the currency union put together “a transparent, concrete, scheduled program in order to bring the deficit and debt down.”
Geither urged European governments and the central bank in Frankfurt to “create a firewall against further contagion.” The Finnish prime minister spoke of “ring fencing” fiscally sound banks and nations in the eurozone from turmoil in the periphery.
The IMF and the United States would both like to see an expansion of the European Financial Stability Facility which was erected last year to borrow for heavily indebted countries in the euro area that aren’t able to finance their debt on the market anymore. Ireland and Portugal have both tapped into the fund to avoid a default. A separate aid facility is also in place for Greece.
Finland and the Netherlands are unwilling to expand the European bailout facility although Rutte suggested that it could be “used in a more flexible manner” to boost market confidence in Europe’s ability to stem the contagion if Greece were to default. “There are no plans in the Netherlands and, as far as I know, in Finland to increase the amount of money we put into the EFSF,” he said though.
Finland and the Netherlands account for 5.7 and 1.8 percent of the EFSF respectively but their AAA credit ratings are vital to its financial credibility.
Germany is responsible for more than 27 percent of the facility’s borrowing power which makes it by far the senior partner in the rescue operation. It, too, is wary of increasing the size of the bailout fund and worried that an added pledge of support will reduce the incentive for heavily indebted nations to reform.