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Eurozone uncertainty

August 30, 2011

German Chancellor Angela Merkel has warned that countries that don't do their homework on reducing debt cannot count on support from the eurozone. Her comments follow a warning from the European Central Bank.

German Chancellor Angela Merkel
Merkel warned EU countries they needed to actImage: AP

German Chancellor Angela Merkel warned that countries that fail to make an effort to reduce sovereign debt will not be able to count on the support of fellow eurozone countries.

Speaking at a campaign rally in the northeastern town of Schwerin, ahead of local elections on Sunday, Merkel said the eurozone would support states that made a credible detour away from costly policies.

"Those that don't do their homework will not get our support," Merkel told the party rally on Monday.

Merkel's speech came after European Central Bank (ECB) President Jean-Claude Trichet on Monday urged eurozone governments to quickly finalize a debt crisis deal they struck last month.

The so-called July 21 agreement settled on a second bailout for Greece and on greater powers for the euro rescue fund.

Trichet told the European Parliament’s economic affairs committee that "full and timely implementation" of the agreement was "of essence." The ECB chief was called to the committee alongside EU Monetary Affairs Commissioner Olli Rehn and Eurogroup Chairman Jean-Claude Juncker.

Italy retreats

However, on the same day as the announcement was made, Italy retracted some of its austerity measures, dropping a proposal for a levy on high earners approved by the cabinet earlier this month.

The "solidarity tax" had proved highly controversial within Prime Minister Silvio Berlusconi's center-right coalition. The government said it would instead step up measures to fight tax evasion in order to raise revenues.

The temporary tax would have amounted to 5 percent on revenues of more than 90,000 euros ($130,000) a year and 10 percent on revenues of more than 150,000 euros.

The government emphasized in a statement that the changes to the austerity plan would not alter the overall savings of 45.5 billion euros. The measures were designed to calm market fears that Italy could follow Greece, Ireland and Portugal in requiring a bailout from the EU and the IMF.

Under pressure from investors and the European Central Bank, the Italian government this month said it planned to restore budget balance by 2013 instead of by 2014 as previously planned.

Eurozone complications

Talks in Europe have been complicated by Finland's demand to secure collateral from Greece in return for its share of the bailout. There is also uncertainty over private lenders' willingness to accept partial losses on their existing loans to Athens.

ECB President Jean-Claude Trichet
'Uncertainty remains particularly high," said TrichetImage: AP

"While a special arrangement for Greece has been launched, the inflexible determination of all other euro area governments to fully honor their own individual sovereign signature is key in returning to sustainable and healthy public finances and contribute to stable market conditions," said Trichet.

There is anxiety that member states have not yet ratified the agreement. The German parliament was due to vote on the package in late September.

'Modest' growth

Meanwhile, the ECB chief also announced that the eurozone economy would continue to grow but at a "modest pace."

The economy of the 17-nation single currency bloc has slowed; after growing 0.8 percent in the first quarter, it slumped to 0.2 percent in the second.

"Uncertainty remains particularly high," said Trichet. "This mainly relates to ongoing fiscal and economic adjustment in a number of euro area countries and most other advanced economies, as well as the overall outlook for the global economy," he added.

His words were echoed by EU monetary affairs chief Olli Rehn, who said he was "seriously concerned about continued financial turbulence spilling over to and potentially harming the recovery of the real economy."

Trichet said the ECB expected inflation to remain above 2 percent in the months ahead and said there were "upside risks to price stability."

Author: Catherine Bolsover, Joanna Impey (AFP, dpa, Reuters)
Editor: Darren Mara