MercoPress. South Atlantic News Agency

Obama sends Geithner in support of the ‘Merkozy” Euro rescue plan

US Treasury Secretary with Germany’s Wolfgang Schaeuble (Photo AFP)

US Treasury Secretary Timothy Geithner threw his weight on Tuesday behind a Franco-German plan to tackle the Euro zone's sovereign debt crisis and said the European Central Bank had to play a major role in any solution.

Geithner offered his support after Standard & Poor's agency fired a second warning shot at the bloc in 24 hours by threatening to cut the credit rating of its rescue fund.

German Chancellor Angela Merkel and French President Nicolas Sarkozy want to change the EU treaty to impose mandatory penalties on Euro zone states that exceed deficit targets, aiming to restore market trust and prevent the crisis spiralling out of control.

Geithner said he was encouraged by moves towards “fiscal union” - under which Euro zone states would obey a common set of tight budget rules - and stressed the central role in tackling the crisis of the ECB, which has been reluctant to take decisive steps until governments get to grips with their budget problems.

Speaking after talks in Berlin with German Finance Minister Wolfgang Schaeuble, Geithner said Euro zone countries needed reforms to lay the foundations for the economic growth which is essential if Europe is to solve its debt problems.

He also called for “reforms to create the architecture of fiscal union to make monetary union more viable for the long run.” Likewise, governments and central banks needed to offer financial support to protect the European financial system and allow states to borrow at sustainable interest rates.

“The ECB has been playing a central role in this crisis. It's obviously going to continue to do that. Of course ultimately, these things only get solved by governments and central banks doing what's necessary, but their rules are different,” Geithner said.

He also met ECB President Mario Draghi in Frankfurt before an EU summit in Brussels on Thursday and Friday, a sign that Washington shares the view that the event may be a decisive moment for the global economy.

Geithner will also meet the leaders of France, Italy, Spain, and EU institutions to press for decisive action.

Draghi has signalled that a Euro zone “fiscal compact” could encourage the ECB to act more decisively. It has been reluctant to buy up debt from distressed euro states more aggressively, arguing that doing so would take pressure off governments to fix their finances.