Bloomberg News

Geithner Back Merkel’s Crisis Plan With ‘Stronger Firewall’

December 06, 2011

(For more on the European debt crisis, see EXT4.)

Dec. 6 (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner backed a German-French push for closer economic cooperation in Europe, urging policy makers to work with central banks to erect a “stronger firewall” to end the debt crisis.

Geithner, speaking in Berlin today after talks with German Finance Minister Wolfgang Schaeuble, praised the commitment to reform programs put in place by new governments in Spain, Italy and Greece, saying that he is “very encouraged” by recent efforts to buttress the euro area. He welcomed “progress toward a fiscal compact for the euro zone,” echoing language used last week by European Central Bank President Mario Draghi.

“This of course will take time” and “a very substantial commitment and a sustained commitment of political will,” he told reporters. “Financial crises are ultimately resolved when governments and central banks succeed in creating conditions that make it compelling for investors to take the risk involved in lending to governments and to banks.”

Geithner’s backing for the stance of German Chancellor Angela Merkel and French President Nicolas Sarkozy marks a shift in emphasis for the U.S. after months of pressing European leaders to do more to tackle the crisis now in its third year. In a September trip to Europe, Geithner urged leaders to set aside their differences to excise “catastrophic risks” from the markets, prompting European criticism of the U.S.’s debt levels.

With an EU crisis summit scheduled for Dec. 8-9, Geithner urged policy makers to work with the central bank to resolve the uncertainty in markets, without mentioning the ECB by name.

Sarkozy Talks

Geithner, who is due to holds talks with Sarkozy in Paris tomorrow after meeting in Frankfurt today with Draghi and Bundesbank President Jens Weidmann, declined to comment on speculation that the ECB could step up bond purchases. Draghi said last week that “other elements might follow” if European leaders agree on a “new fiscal compact.”

“I’m here in Germany, of course, to emphasize how important it is to the United States and to the world economy as a whole that Germany and France succeed alongside the other nations of Europe in building a stronger Europe,” the U.S. Treasury Secretary said.

The three key elements of success for the euro zone are economic reforms in member states to lay the foundation for future economic growth, reforms to create the architecture of fiscal union to make monetary union more viable for the long run, and financial support by European governments and central banks in the form of a “stronger firewall.”

S&P ‘Encouragement’

Schaeuble said earlier today that a Standard & Poor’s downgrade warning for 15 euro-area governments including AAA rated Germany and France will help force European leaders to ratchet up efforts to resolve the two-year-old crisis this week.

A day after Merkel and Sarkozy strengthened their push for new rules to tighten euro-area economic cooperation, Schaeuble called S&P’s warning the “best encouragement” to drive toward a solution at this week’s summit in Brussels.

Geithner said that the International Monetary Fund can play a helpful role in the European debt crisis and that the U.S. will support the fund’s “constructive” efforts.

Eyes of the World

While Geithner said that “the eyes of the world are very much on Europe” during the debt crisis, he said the U.S. too continues to faces “very challenging” economic times.

“We have a lot of work ahead of us in laying a foundation for stronger financial fiscal reforms, in creating conditions for stronger growth in the future, in repairing and reforming our financial system,” he said.

Merkel and Sarkozy are leading the charge toward the latest crisis fix after agreeing to a joint position on automatic penalties for deficit violators and anchoring debt limits into euro states’ constitutions. Investors are looking toward such an agreement among euro countries to pave the way for intensified action from the ECB.

Geithner said he wouldn’t comment on what the ECB ‘should do or will do or can do.” The ECB has been playing a “central role in this crisis,” he said. “Obviously it’s going to continue to do that, and of course ultimately these things only get solved by governments and central banks doing what’s necessary. But their roles are different.”

The Treasury secretary will hold talks with Italian Prime Minister Mario Monti on Dec. 8 in Milan. Geithner will return to Washington before the European summit.

--With assistance from Tony Czuczka and Patrick Donahue in Berlin. Editors: Kevin Costelloe, Alan Crawford

To contact the reporters on this story: Ian Katz in Berlin at ikatz2@bloomberg.net; Cheyenne Hopkins in Washington at chopkins19@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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