Merkel: Europe faces historic test in euro crisis

[May 19, 2010]  BERLIN (AP) -- German Chancellor Angela Merkel called for tougher financial regulation and a crackdown on government debt, saying the future of the euro currency and a united Europe itself were at stake.

Merkel urged lawmakers Wednesday to pass Germany's share of a new euro750 billion ($1 trillion) eurozone rescue package, saying that defending the shared European currency is "about no more and no less than the preservation of the European idea."

"That is our historic task; if the euro fails, then Europe fails," she told the lower house of parliament. "The euro is in danger -- if we do not avert this danger, then the consequences for Europe are incalculable, and then the consequences beyond Europe are incalculable."

Merkel's warning follows Germany's decision Thursday to ban so-called naked short-selling of eurozone government debt and shares of major financial companies. Naked short-selling involves a trader selling shares or investments he doesn't own.

The move roiled financial markets, in part because it suggested to traders that policymakers were grasping at straws to stem the crisis of confidence over the ability of European governents to pay off their heavy debt loads amid slow growth. Politicians have repeatedly condemned "speculators" for selling off government bonds and driving up borrowing costs, but many analysts say the real problem is simply too much debt.

Still, Europe is showing a newfound resolve to strengthen its regulatory grip on markets. On Tuesday, European Union governments agreed to tighten rules for freewheeling hedge funds.

Citing the short-selling restriction, Merkel said Germany will act alone in areas where that causes "no damage," and said the ban would remain until wider European rules are drawn up. Still, the move initially unsettled markets and helped push the euro down.

Merkel said a sudden huge drop on stock markets May 6 offered a taste of those consequences. The U.S. Dow index fell almost 1,000 points and then recovered most of its ground; US authorities have not come up with the exact reasons why the dip happened.

Germany, Europe's biggest economy, is to contribute at least euro123 billion in loan guarantees to the new package. Parliament is expected to vote on Friday -- just two weeks after approving a separate package for Greece, already unpopular at home.

While the root cause of the debt crisis was insufficiently competitive countries living above their means, Merkel said, markets poured oil on the fire.

That, combined with the financial crisis of the past two years, raises "the question of how we can assert the primacy of politics," she said -- arguing that people "just want one thing, and I think they're right: they want things to be fair."

"We are now seeing anew how, through a lack of limits and rules, purely profit-oriented behavior on the financial markets can be destructive," Merkel added. "It is the task of politicians, parliaments and governments to intervene, to regulate, in case of doubt to ban in order to keep the risks controllable."

Merkel renewed a pledge to push for taxation of financial markets -- either a financial transaction tax or another form of levy -- in Europe and beyond. She also pushed for quick action to put ratings agencies under European supervision and to increase transparency on derivatives markets.

The chancellor acknowledged that Berlin has faced accusations of being "hesitant or slow" in agreeing rescue packages for debt-laden European nations, but was unapologetic about pushing for them to be made to tackle their budget deficits.

"Europe needs a new culture of stability," she said, with faster and more effective punishment for countries that habitually run excessive deficits.

Those could include withholding European Union structural funds and temporarily withdrawing voting rights from repeat offenders, she said -- adding that it was important to draw up procedures for an "orderly state insolvency."

Above all, though, Merkel said all EU members must speed up cutting their deficits.

"Only then can the rescue attempts be effective, because continuing to cover up the real causes of the crisis wouldn't help Europe," she said.

"Germany advocates lasting stability in Europe -- we're not going to spare anyone in Europe from that."

[Associated Press; By GEIR MOULSON]

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