The only immediate solution to the euro zone crisis is for the European Central Bank (ECB) to step in as the ultimate backstop because the bloc's rescue fund has failed to convince markets and EU treaty changes would take too long, Irish Prime Minister Enda Kenny told Reuters on Wednesday.
In an interview conducted shortly after he met German Chancellor Angela Merkel in Berlin, Kenny said some countries in the euro zone faced liquidity problems and he urged political leaders in Europe to move fast to prevent contagion.
Merkel is pushing for changes to the European Union's Lisbon Treaty to make the bloc's fiscal rules more enforceable and opposes using the ECB as a lender of last resort.
We've always believed in enforceable rules, but that carries with it the requirement that where there is vulnerability you need a credible backstop, Kenny said.
My view is that ultimately that's the ECB. We don't have that now. And the EFSF (European Financial Stability Facility)which was signed off on politically to be that backstop has proven not to have the confidence of the markets. We have to deal with this crisis and deal with it now.
Kenny failed to convince Merkel about using the ECB's full firepower in their talks, admitting there were divergent views on the issue. He also expressed reservations about her push for a treaty change, which would likely require a referendum in Ireland.
Since sealing a bailout from the EU and International Monetary Fund (IMF) a year ago, Ireland has introduced tough economic reforms, winning back a degree of market confidence.
But Kenny said Ireland remained vulnerable despite its progress and made clear that changes to the EU treaty would not alleviate the risks, saying past efforts to alter the bloc's charter had been complex, difficult and quite long.
In my view if you proceed down the road of major treaty change you enter that process and it leaves aside the immediate liquidity problem and the provision of a credible backstop which you need and you need now, Kenny said.
So you need to focus politically on what needs to be done to create a credible firewall to deal with that contagion, he said.
Clearly the EFSF hasn't measured up in the context of confidence from the markets as being the firewall that is necessary. We are seeing the indications of lack of confidence in other countries. Clearly there is a liquidity problem here that needs to be dealt with.
(Reporting by Michael Stott and Noah Barkin)