Eurozone nations have begun setting up a giant fund that could rescue any member of Europe’s currency union from default, aiming to soothe market jitters that have sent the euro to a new four-month low against the dollar, Reuters reports.
The “shock and awe” financial rescue package from the European Union and the International Monetary Fund will total €750 billion ($1 trillion) money that can be lent to any indebted eurozone nation risking default, and intended to counter investor fears that Spain, Portugal or others could follow Greece in requiring a bailout to meet debt repayments.
The special purpose vehicle to borrow up to €440 billion ($526 billion) will be ready this month, when countries formalize debt guarantees for some 90 percent of the package, said Luxembourg Prime Minister Jean-Claude Juncker, who led Monday’s talks between eurozone finance ministers.
Another €60 billion managed by the EU’s executive commission “is available to cover urgent financial needs were it to arise” in the meantime, he said, while the International Monetary Fund will provide another €250 billion.
German Finance Minister Wolfgang Schaeuble told reporters that markets “want to see not only actions but deeds” to shore up the currency.
German Chancellor Angela Merkel vowed to “set an example” Monday by laying out plans to save €80 billion through 2014 by reducing handouts to parents, cutting 15,000 government jobs and delaying projects such as construction of a replica of a Prussian palace in Berlin.
Juncker said eurozone finance ministers wanted Spain and Portugal to build on current “significant and courageous” spending cuts with further efforts “needed beyond 2011 together with further progress” on structural reforms, such as changes to pensions, welfare or labor systems.
Eurozone nations said in a joint statement that they would draft bigger cuts and tax increases if they have to and would pursue “structural reforms” to slim state running costs _ such as raising retirement ages to curb pension costs.
The International Monetary Fund called in a Monday report for eurozone countries facing market pressure to shun “delayed or half-hearted” budget cuts and draft more in case they can’t make current targets to reduce budget deficits _ the gap between government spending and income.
Juncker dismissed market volatility in recent days triggered by concern that Hungary _ which does not use the euro _ could be the next European government to follow Greece by risking a default.
Hungarian officials last week warned that the country’s deficit is growing and the country is close to default, two years after it received a bailout from the EU and the IMF..
Hungary’s government has downplayed those comments, which nevertheless kept the euro trading near the four-year lows it hit Friday, when it went below $1.19 for the first time since March 2006.
However, trade unions warn that budget cuts could be going too far and could choke a fragile recovery that so far relies more on exports than domestic demand in European countries where people are still slow to spend and companies are reluctant to hire new workers.
Unemployment in the eurozone reached a 10-year high of 10.1 percent in April _ adding extra welfare costs to governments struggling with higher outgoings, lower tax revenue and debt that has soared since they paid out hundreds of billions to shore up the region’s banking system.
Monday’s talks between eurozone finance ministers will be followed by a meeting of most EU finance ministers and EU officials who will thrash out plans for long-term ways to avoid a new economic crisis, including a proposal for more EU oversight of national budgets. [via ABC News; image via Flickr]