Sort out the debt crisis, Obama warns Europe

PRESIDENT Barack Obama will send an uncompromising demand today for Europe to sort out its crippling debt crisis, in a clear sign of how the continuing doubts over the continent’s solvency are now threatening trade across the globe.

The US president’s treasury secretary, Timothy Geithner, is to take the unprecedented step of joining EU finance ministers in talks in Poland, where he is expected to issue a clear demand that they take collective action to back the continent’s most indebted nations.

The call will be seen as being directed primarily at Germany, the EU’s largest economy, which is now coming under intense pressure to put its massive financial clout behind Greece, Italy, Spain and other debt-crippled countries, to erase all fears of sovereign defaults.

Chancellor Angela Merkel is, however, facing political pressure in Germany amid concerns that the country could end up mortgaging its future to bankrupt nations in the south of the continent.

US fears centre on concerns that a wave of sovereign defaults in Europe would lead to massive losses for banks which have leant to those countries, triggering a fresh credit crunch.

Yesterday, markets bounced back after five central banks across the world said they would hand commercial banks three additional tranches of dollar loans to help ease funding pressures.

Mr Geithner will tell reluctant northern eurozone countries, which also include Finland and the Netherlands, that they must “overcome their domestic obstacles for the sake of the rest of the world,” one US official said.

In an interview yesterday, he said that European countries now recognise “they are going to have to do more”.

He added: “I think they recognise that they have been behind the curve. They recognise that it is going to take more force behind their commitments.

“I think they recognise they are going to have to do more to earn the confidence of the world that they have the political will to do this.”

On Wednesday, Ms Merkel and the French president Nicolas Sarkozy said they stood behind Greece in its efforts to bring its vast debts under control.

But the markets remain unconvinced that such political pledges will hold, and that the debt crisis will not spread to Italy, Spain and other weak euro-economies.

In a sign of US frustration at the deadlock, Mr Obama also took the unusual step of making a call for Europe to adopt a more integrated political model.

He told journalists that the European leaders had to “take a decision on how to co-ordinate monetary integration with more effective co-ordinated fiscal policy”.

His call comes after EU chief Jose Manuel Barroso told the European Parliament earlier this week that a federal Europe was the way forward.

The American plea for action follows similar calls from China, which is demanding concerted joint action across the eurozone in return for buying up sovereign bonds.

To add to the clamour, International Monetary Fund managing director Christine Lagarde said that “bold action” was needed.

She said: “Uncertainty hovers over sovereigns across the advanced economies, banks in Europe, and households in the United States. Without collective, bold action, there is a real risk that the major economies slip back instead of moving forward.”

Meanwhile, in London, Deputy Prime Minister Nick Clegg said that the UK government was prepared for the “absolute very worst” if the debt crisis exploded. “This is a very difficult time and in effect we are seeing that the banking crisis of 2008, which was like a great big economic earthquake, is now sending out a whole series of aftershocks which are affecting governments and banks elsewhere in Europe and the world,” he said.

Mr Geithner is also expected today to urge the eurozone to copy US measures designed to boost liquidity in the region. The moves have been given a cautious nod of approval by the EU officials.

He also said that a rescue package was affordable. “Even if you take a very conservative, pessimistic estimate of the ultimate cost of resolving this crisis for Europe, it is completely within the capacity of the stronger members of the euro area to absorb those costs,” he said.

Any hope that the euro area will be supported by a rebounding economy were deflated as the EC unveiled new figures yesterday showing growth is set to come to a near standstill in the region.

The commission forecasts economic growth in the 17 euro countries will be only 0.1 per cent in the fourth quarter, down from 0.2 per cent in the third.