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May 14, 2021

Eurozone, where to?

Important summit this week, when EU leaders are likely to clash over increasing the lending capacity of the euro zone’s bailout fund, with Germany and other strong members of the currency bloc continuing to resist such efforts, reports The Wall Street Journal.

The debate comes amid concern that failing to take more decisive action following last month’s emergency loan for Ireland risks financial turmoil spreading to Portugal, Spain and beyond. One option would be to increase the lending capacity of the European Financial Stability Facility, as the bailout fund is called, without increasing the EUR440 billion worth of government guarantees that back loans issued by the fund, the newspapers added. The governments will also discuss the possibility of allowing the fund to buy euro-area government bonds, officials said.

“There may be some push in that direction by the ECB, which is increasingly unhappy about the current situation,” a euro-area official said.

Also, the Irish Times notes that the severe recession and the sovereign debt crisis have been the first major “test to the resilience” of the euro zone in its decade-long history, according to the Organisation for Economic Co-operation and Development (OECD). The effects of adjustments will be greatest in the weaker peripheral countries where either private or public sectors over-expanded. “Adjustment will be a difficult and prolonged process in some deficit countries, particularly where prices and wages need to adjust to help shift resources from domestically focused sectors that grew too big during the boom years.”
The report lauds measures taken to put in place much more wide-ranging financial sector supervisory structures. It also believes that removing obstacles to integration of the financial services industry on a euro zone-wide basis would enhance stability. On the other hand, German financial analysts say market expectations of this week’s summit are low and that the euro zone’s present rather its future is understandable.

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