Effect of crisis on NZ 'modest'

Sir Michael Leigh
Sir Michael Leigh
Sir Michael Leigh, who was knighted in January for his services to the European Union, has just completed a tour of New Zealand's universities. He spoke to business editor Dene Mackenzie about the prospects of progress in the euro cash crisis.

Greece's finance minister says Athens is close to sealing a deal with its international lenders on fresh austerity measures in exchange for billions of euros in aid funds.

That could come as soon as Monday but Greek Finance Minister Yannis Stouranas warned that negotiations were difficult.

Sir Michael Leigh, who was until recently the director-general for enlargement with the European Commission, said the negotiations were crucial.

Sir Michael, who was knighted in January for his services to the European Union, said there was an urgent need to make Greece more competitive.

The so-called troika of the International Monetary Fund, the European Central Bank and the European Commission were ready to provide the next tranche of bail-out funds if Greece agreed to 11 billion ($NZ17.33 billion) of austerity cuts.

The Greeks felt they needed more time to introduce the cuts and were struggling to agree on how to implement them.

"They have asked for further grace - another two years out to 2016. It remains to be seen if Germany will agree to that," he said in an interview.

Progress on implementing those cuts could determine if the heavily indebted country receives a slice of the 31.5 billion ($NZ49.65 billion) it needs to survive.

Sir Michael had recently moved to become the senior adviser to the German Marshal Fund, a non-partisan American public policy and grant-making body dedicated to promoting better understanding and co-operation between North America and Europe on transatlantic and global issues.

The ECB had demonstrated it was prepared "to do what it takes" to get past the euro cash crisis, he said.

ECB governor Mario Draghi was prepared to take a lead if necessary on buying government bonds.

Sir Michael believed there had been some encouraging signs recently from Europe.

The European Stability Mechanism (ESM) had been approved by the German Constitutional Court and the Dutch elections, in which anti-EU extremists on both the Right and the Left were expected to win, had allowed mainstream parties to form a government.

While there was still opposition to the bail-outs of some countries, the new Government was committed to the EU, he said.

The key aim was to reduce the high interest rates being paid by Italy, Spain, Portugal and Greece.

Italy had a large debt but most of it was held domestically. The country was strong industrially and it was a matter of ensuring debt levels were reduced to sustainable levels.

"I am confident Italy can come back stronger than before."

Portugal, a smaller country, was committed to completing reforms set out by the IMF.

Spain's banking industry was still troubled and the Government was now being asked by its provinces for help.

For Germany, the strongest country in the EU, its export markets had slowed because of the cash crisis, Sir Michael said. It was in Germany's interests to help develop policies to stimulate growth and employment.

"The major fear is the risk of contagion. If the problems are not ring-fenced, they could spread."

After a 10-day tour of New Zealand, speaking to government officials, private sector business leaders and academics, Sir Michael came to the conclusion that the impact of the cash crisis on New Zealand was muted.

The weakness of the euro and the US dollar was contributing to a stronger kiwi, which was a challenge. However, the EU was New Zealand's third-largest export market and New Zealand exporters were feeling this through reduced demand in Australia and China.

"This is very much a two-stage process. The effect here is extremely modest."

Some of the more positive effects seen included China beginning to take action by talking about infrastructure projects, reducing interest rates and considering ways of stimulating domestic demand.

"China's growth has come from exports, creating a huge imbalance.

Their surplus is someone's deficit. It has to come back to stimulating domestic demand," he said.

If that happened, there would be growing domestic demand for raw materials and food from Australia and New Zealand.

The "new" Chinese middle class wanted to buy New Zealand lamb and dairy products.


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