Size doesn't matter

Danish television anchors took joy on Saturday in announcing that eurozone finance ministers meeting in Copenhagen on Friday and Saturday had agreed to a deal to fund the eurozone bailout with a maximum of 6 trillion - before tellling viewers that was the sum in Danish krone, equivalent to about 800 billion euros.

The currency trick, however, was also aimed at the United States and financial markets, as 800 billion euros converts to $1.1 trillion - an amount the 17 eurozone ministers hope will calm fears that the eurozone's problems could spread outside Europe.

Size doesn't matter

But the amount of money doesn't actually matter, according to Jörg Asmussen, a member of the European Central Bank's executive board. He said regardless of how high it is, the amount would not be enough to save indebted countries if they fail to implement reforms.

"No firewall, as big as it may be, can replace the reform process in member states," he said. "That means budget consolidation and stimulus for growth can never be replaced by a firewall."

Jens Weidmann, the president of Germany's central bank, added that the bailout funds only buy time.

"The main element is addressing the causes of the crisis," he said.

When it comes to budget consolidation and reforms, German Finance Minister Wolfgang Schäuble said Spain and Italy are making good progress. Schäuble added that reforms in Spain are proving to be difficult and painful but necessary.

IMF, US show support

Christine Lagarde, head of the International Monetary Fund, welcomed the announcement out of Copenhagen. She said the deal would make it easier to "support the IMF's efforts to increase its available resources for the benefit of all our members."

By the middle of April lending volumes for the globally active fund are set to reach 460 billion euros, at least some of which could flow to Europe if the sovereign debt crisis were to worsen. EU states intend to make 150 billion euros available to the IMF in the form of credits with the rest coming from non-European states, emerging countries and the United States.

For its part, the United States issued a positive judgment on the eurozone's decision.

"The announcement by the eurogroup reinforces a trajectory of positive efforts to strengthen confidence in the euro area," US Treasury spokeswoman Natalie Wyeth said in a statement.

The European Commission's currency chief, Olli Rehn, said Europe has now done its part for financial stability.

"The euro area took the very significant decision to reinforce the euro area financial firewalls," he said. "The euro area has responded to calls from our global partners, the G20 and the BRIC countries. I trust today's decision will pave the way for an IMF decision at the spring meetings."

World interested in solvent Europe

Swedish Finance Minister Anders Borg said it's clear the G20, a group of the world's most important industrial and emerging states, has an interest in a solvent Europe, adding that the effects of an aggravated crisis in Europe would be felt in Latin America as well as eastern Europe.

The German portion of the extra funding heading to the IMF will be about 40 billion euros. The money is likely to come via a credit from the Bundesbank, Germany's central bank, to the IMF. Weidmann said the Bundesbank would be willing to provide the credit to the IMF if it receives a parliamentary mandate.

How involved German parliament will become in the dealings of the independent central bank, however, remains a touchy topic and source of tension among German politicians and economists.

Rational markets?

The German finance minister said in Copenhagen that he was irritated ministers' meetings only discussed how many billions to make available to rescue funds, when they should be working to push through economic reforms to win back the trust of financial markets. Schäuble went on to criticize markets for being too sensitive and exaggerating their responses to minor policy changes.

"I do not believe in the rationality of the markets," Schäuble told students at Copenhagen University. "Now it's about winning back trust."

During the second day of meetings, ministers debated the importance of a financial transaction tax. They, however, made little progress in reaching a compromise and instead created a working group to calculate the effects of such a tax.

Germany was among the tax's proponents, saying the charges were a "fair" way of getting the people and companies responsible for the economic crisis to pay their share of the costs to fix it. Great Britain and the majority of other EU states, however, reject the idea of a transaction tax.

Author: Bernd Riegert / sms
Editor: Martin Kuebler