German chancellor says EU bailout fund would halt speculation on euro, Greek default

Merkel says EU bailout fund would halt speculators

LUXEMBOURG — German Chancellor Angela Merkel said Tuesday that a European monetary fund to bail out eurozone nations in need would send a clear signal to markets speculating on the possible break-up of Europe’s currency union.

She said Greece’s debt crisis is forcing the European Union to make changes that would allow “coherent economic policy-making,” such as financial help for the 16 countries that use the euro. She also asked for U.S. help to curb traders’ bets on a possible default in the eurozone.

The euro has slid against the U.S. dollar in recent months on worries over Greece’s soaring debt as markets questioned what would happen if a eurozone country were unable to pay its debts — and whether it could rely on help from bigger euro nations such as Germany.

Speaking after a meeting with Jean-Claude Juncker, the head of the eurozone’s finance ministers, Merkel said a tighter framework that could handle a potential default by a eurozone country would send a clear “signal to markets that speculation cannot work.”

“We are thinking of all eurozone nations,” she said. “We agree that we must discourage financial market speculation.”

She called for the United States to help curb the use of credit default swaps on sovereign debt, a form of insurance that allowed traders build up huge bets on whether Greece and other indebted eurozone nations were likely to default on their borrowings. Greek officials have blamed financial speculation for some of the market pressure on their bonds.

“We have looked at this and we think that now a quick action is needed” to stop this practice, she told reporters. “The U.S. needs to make a gesture … We think a step forward would greatly help.”

The market frenzy in recent weeks has forced the hands of eurozone leaders to go beyond vague promises of help for Greece and start discussing possible bailout procedures. It has also pushed Greece to tighten its austerity program.

Merkel stressed that Greece was not looking for a bailout and had “done its homework” by promising tough budget cuts that had restored market confidence in the country’s ability to handle its debt.

But she said the crisis is forcing other EU nations to ask “how do we get to coherent economic policy-making.”

Her proposal for a European monetary fund, likely to be financed by EU governments, would not replace current EU budget rules that require members of the euro currency to stick to limits on debt and deficit that most have ignored since the financial crisis forced them to spend heavily to keep their economies afloat.

She said Monday that EU governments would have to draft changes to the European Union’s Lisbon treaty to set up such a fund — a tough prospect after the treaty took nine years to be negotiated and ratified by all 27 EU members states.

The European Central Bank’s chief economist Juergen Stark opposes such a fund, writing in the German daily Handelsblatt that it would “set the wrong incentives” and would be “a burden for countries with solid public finances.”

The EU’s executive commission — which must draft any reforms to EU law — said there are plans to set out some kind of framework to reinforce economic coordination and surveillance of EU countries by July.

EU spokesman Amadeo Altafaj Tardio said he could not give details because discussions on a proposal are still “premature.”

European trade unions said there is a pressing need for some kind of solution to the debt crisis because market speculation is damaging jobs and the region’s growth.

Georges Dassis, an official of Greece’s GSEE union, said it was “vital to establish a fund in Europe that could be a shield against speculation.”

Associated Press writer Aoife White and Gretchen Mahan in Brussels contributed to this story.