Germany insists euro will not fail

Germany's finance minister has moved to reassure investors over the future of the euro currency.

Wolfgang Schaeuble, the German finance minister, has dismissed claims the euro zone will break up, warning market speculators that the single currency is here to stay.

In a move to calm investors' fears, Mr Schaeuble said all the leaders of the 16-nation bloc were committed to the euro and that a return to national currencies would be a huge mistake.

"Those who bet their money against the euro will have no success … the euro will not fail," Mr Schaeuble said in an interview in Bild am Sonntagnewspaper. "The euro benefits us all and we will defend it successfully."

European leaders meet this week to discuss ways to solve a euro-zone debt crisis that has triggered bailouts for Greece and Ireland, and which analysts say could engulf other countries. They are expected to agree on the terms of a permanent rescue mechanism.

Germany and France have pledged to better align their tax and labour policies to foster convergence in the euro zone, but have rejected calls for an increase in its rescue fund and joint sovereign bonds.

Pressure on struggling euro members eased slightly last week after the European Central Bank (ECB) bought government bonds in a thin end-of-year market, pushing down the borrowing costs of countries on Europe's southern periphery.

"If even a smaller country were to drop out the consequences would be incalculable," said Mr Schaeuble. "I think of the Lehman bankruptcy when I say this: we must not make the same mistake twice."

Germany has opposed calls by Spain and other countries to move towards a full-fledged "fiscal union" in the euro bloc, but appeared to have agreed to a limited form of policy co-ordination.

In a separate interview in The Wall Street Journal, Mr Schaeuble said recent events could help to bring the bloc together, although he offered little detail.

"Sometimes it takes crises so that Europe moves forward," he said. "In this crisis, Europe will find steps toward further unification."

When they meet this week, European leaders are planning to insert two sentences into the EU treaty to pave the way for the creation of the European Stability Mechanism (ESM) from 2013, draft conclusions of the summit showed.

The ESM is to open the way for private-sector investors to take a loss in case of a sovereign debt restructuring, which will put market pressure on governments to conduct sound fiscal policies and prevent another sovereign debt crisis.

The ESM would also provide financial support to countries that suffer liquidity, but not solvency problems, through a fund that is likely to be bigger than the current €750 billion (Dh3.64 trillion) bailout fund. But to create the ESM, Germany and France insisted that the EU treaty is amended so its operations are not deemed unconstitutional by German courts.

The draft conclusions, obtained by Reuters, said leaders of the 27-nation bloc would agree to amend the treaty by adding the following sentences to the existing article 136:

"The member states whose currency is the euro may establish a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under the mechanism will be made subject to strict conditionality."

Euro-zone finance ministers are also to finish work on setting up the ESM through an intergovernmental arrangement by March.

"The mechanism will be activated by mutual agreement of the euro area member states in case of risk to the stability of the euro area as a whole," the draft leaders' conclusions said.

The EU summit will also decide that while the mechanism will be for euro-zone members, other EU countries can be involved in the work setting it up if they want to and can take part in ESM operations on an ad hoc basis.

This is similar to the case of Ireland, where the euro-zone countries lent to Dublin, but Britain, Sweden and Denmark, all non-single currency members of the EU, also provided bilateral loans.

The ECB said that to put the euro back on an even keel, governments, not thebank, must solve the sovereign debt crisis.

ECB policymakers have become increasingly vocal in urging governments to tackle the debt crisis, which has forced a near €200bn bailout of Greece and Ireland and put pressure on countries such as Portugal and Spain.

They fear that if the problems escalated further they would be forced to ramp up the bank's controversial purchases of sovereign bonds.

* with Reuters