Geithner to Talk Euro Crisis with Germany

May 24, 2010 Updated: May 24, 2010

MUNICH—U.S. Treasury Secretary Timothy Geithner plans to visit the European Union this week, to discuss the troubled euro currency and the latest regarding the 750 billion euro ($950 billion) emergency fund that is on its way to being fully approved by the members of the Eurozone.

After much controversy surrounding the emergency bailout fund, Germany finally agreed to put in a 147 billion euro ($185 billion) contribution, therefore strengthening its commitment to help troubled Eurozone members.

Judging from Germany’s commitment to take an appropriate part in the emergency fund, Geithner is confident that the Eurozone would find a way to handle the crisis and maintain its unity. “Europe has the capacity to manage through this,” he told reporters last week. “And I think they will.”

He is expected to be in Berlin on Thursday to meet with German Finance Minister Wolfgang Schäuble to discuss sensitive topics such as the bailout fund and the recent controversial German law to ban some financial bets, including so-called “naked” short selling of European debt, which basically prohibits investors from speculating on European debts.

Many renowned economists worldwide, including Howard Wheeldon, who is a senior strategest at BGC Partners, are of the opinion that the ban on short selling advocated by German Chancellor Angela Merkel will undermine the euro and financial markets across Europe.

“By taking such a heavy-handed approach, all the German chancellor has done is to make the euro's battle for survival even tougher. In the process, she has not only undermined the euro but also German financial markets, the Eurozone area and the EU as a whole, by undermining trust in the markets,” he wrote in a commentary in The Scotsman.

This week, Schäuble will present a nine-point plan to European Finance Ministers. The plan is a set of objectives aimed at avoiding a repeat of Greece’s situation, including faster budget cuts and tougher penalties for countries that fail to follow fiscal rules set by the Eurozone. The plan also includes an exit-clause option for bankrupt countries to safely leave the Eurozone.

Eurozone could shrink

At a news conference following the Brussels meeting last week, EU President Herman Van Rompuy found the plan sound and is ready to implement some of its points.

"We already found agreement on the four main objectives and also on the direction in which we will move forward for each of them," said Van Rompuy in a European Commission statement.

“In short, the German exit-clause proposal, while superficially sensible, was something perhaps necessary a decade ago but would now take the crisis to another level,” commented Harvinder Sian of Royal Bank of Scotland Group in a Handelsblatt report, on the need to have such a plan long before the Eurozone formed.

With the exit-clause in place, economists predict that the Eurozone could shrink in the years to come.

“There is a high likelihood that in three or five years time the number of countries that are members of the Euro zone is going to be smaller than today. Certainly a couple of them look extremely weak and there may be a break up of this monetary union,” notable economist Nouriel Roubini, who is famous for predicting the current economic crash, said in an interview with Channel 4 TV in the U.K.

If the Southern Eurozone members, known for their great vacation spots such as Greece, Spain, Portugal and Italy, continue to face financial difficulties, they would be the first ones to leave the monetary union thus putting the euro at an even greater strain.

Daniel Tarullo, the U.S. Federal Reserve Governor, is of the opinion that the United States and the world will be heavily impacted if the euro continues its downfall.

“If the economy in the Eurozone crashes and the European Finance Sector gets in trouble, it would endanger the global economy,” said Tarullo. “When the problems in Europe continue to worsen, it would pose a threat to the US banks who may suffer heavy losses,” he added.