EU running out of time as Greece nears the exit

Euro­pean Coun­cil Pres­i­dent Her­man Van Rompuy, right, and Euro­pean Com­mis­sion Pres­i­dent Jose Manuel Bar­roso, address the media at the end of an EU sum­mit, at the Euro­pean Coun­cil build­ing in Brus­sels, Thurs­day. The lead­ers of the 27 coun­tries that make up the Euro­pean Union met in Brus­sels to try and find a way to keep the debt cri­sis in Europe from spi­ral­ing out of con­trol and pro­mote jobs and growth. Rompuy said that all EU lead­ers want Greece to remain in the euro­zone while respect­ing its com­mit­ments to pay back its debt. (AP Photo/Yves Logghe)

DANIEL WOOLLS, DEREK GATOPOULOS

Asso­ci­ated Press

ATHENS, Greece — Euro­pean lead­ers insist they want to keep Greece in the euro­zone, but are putting off any agree­ment on how they hope to accom­plish that. Greece says it, too, wants to stay in the euro­zone, but until after elec­tions it’s uncer­tain whether it can imple­ment the aus­ter­ity that Europe has set as a con­di­tion for doing so.

Essen­tially, both are play­ing for time — about a month. The ques­tion is whether finan­cial mar­kets will wait or force their hand.

Con­cerns that Euro­pean lead­ers lack the polit­i­cal will — and where­withal — to tackle the continent’s eco­nomic prob­lems have wor­ried the mar­kets for weeks. Among the 17 coun­tries that use the euro, seven are in reces­sion. Busi­ness con­fi­dence is under pres­sure and banks are feel­ing the squeeze. The biggest fear is that if Greece can­not be kept in the euro, other larger economies — like Spain or Por­tu­gal — might face the same fate.

“The breakup of the euro­zone will be a dis­as­ter. Greece could leave, and oth­ers could leave, and this would be a huge finan­cial tsunami,” said Dar­iusz Kowal­czyk, senior econ­o­mist at Credit Agri­cole CIB in Hong Kong. “Europe is not doing enough, and the mar­ket may not wait for them.”

Greece has gone through round after round of mas­sive spend­ing cuts and tax hikes to slash its deficit and rein in its debt in exchange for the inter­na­tional bailout loans that help it pay the bills. But the coun­try is now in its fifth year of reces­sion, and many argue it can­not hope for a recov­ery if it sticks to the deal. And Greeks — though still keen to remain in the sin­gle cur­rency club — are call­ing for bet­ter terms or, at least, for the pace of aus­ter­ity to be slowed down.

In a gen­eral elec­tion this month, nei­ther of Greece’s two main par­ties, both of which sup­port the bailout deal, fared well. Instead, minor par­ties that are threat­en­ing to renege on those com­mit­ments saw their pop­u­lar­ity surge. A new round of elec­tions is set for June 17.

If the Greeks pick an anti-bailout gov­ern­ment the sec­ond time round and renege on the terms of the bailout, the flow of funds will be stopped and the coun­try could be forced into a messy exit from the euro bloc as it has no other choice but to print its own cur­rency to pay its way.

That could cause a deeper frac­ture the euro — other debt-stricken euro­zone mem­bers, such as Spain and Por­tu­gal, might also fall vic­tim to mar­ket fears that they could be next in line for col­lapse — and rat­tle global finan­cial markets.

There had been hope that this week’s Brus­sels sum­mit would have seen a soft­en­ing in the rest of the eurozone’s stance with Greece, extend­ing, for exam­ple, the dead­line for some of its reforms and cuts.

Some Euro­pean coun­tries are already hint­ing that Greece should be given bet­ter terms. Both the Inter­na­tional Mon­e­tary Fund and the Orga­ni­za­tion for Eco­nomic Coop­er­a­tion and Devel­op­ment, which mon­i­tors eco­nomic trends in devel­oped economies, also are push­ing for the demands on some coun­tries to be eased.

How­ever, as their sum­mit in Brus­sels broke up early Thurs­day morn­ing, the lead­ers failed to offer any reprieve to strug­gling Greece. Instead they reit­er­ated that they con­tin­ued to sup­port Greece’s euro­zone mem­ber­ship — pro­vided it stuck to the terms of the bailout deal.

Manuel Bar­roso, Pres­i­dent of the EU’s exec­u­tive Com­mis­sion, told a post-summit press con­fer­ence: “We stand by Greece. We expect that Greece also stands by its commitments.”

Euro­pean Coun­cil Pres­i­dent Her­man van Rumpoy echoed the sen­ti­ment: “Con­tin­u­ing the vital reforms to restore debt sus­tain­abil­ity, fos­ter pri­vate invest­ment and rein­force its insti­tu­tions is the best guar­an­tee for a more pros­per­ous future in the euro area.”

Some politi­cians have already begun to fac­tor in a Greek exit, how­ever. In a frank admis­sion that Greece could wind up aban­don­ing the euro, Lux­em­bourg Prime Min­is­ter Jean-Claude Juncker told reporters that the euro­zone coun­tries “have to con­sider all kinds of events,” but insisted that “the work­ing assump­tion” was that Greece would remain part of the euro.

The Euro­pean lead­ers aim to have more con­crete pro­pos­als for strength­en­ing the region at their next sum­mit on June 28–29, but before then Greece will have held its elec­tions, by which time Europe’s finan­cial sys­tem may have already been pushed to the brink.

French invest­ment bank Credit Agricole’s research ana­lysts said EU lead­ers had set the expec­ta­tions bar very low for the sum­mit “and yet they man­aged to dis­ap­point ner­vous markets.”

Shares on the Athens Stock Exchange hit a new 22-year low Thurs­day, clos­ing down 4.53 per­cent despite gains made else­where in Europe.

There are con­cerns among investors that uncer­tainty over Greece’s future in the euro­zone could spark a run on the country’s banks, fur­ther desta­bi­liz­ing the already-shaky bank­ing sys­tem and push­ing the coun­try even quicker towards a chaotic exit from the currency.

Greeks have been steadily with­draw­ing deposits in recent months. Bank of Greece fig­ures show that total house­hold and busi­ness deposits stood at about €165 bil­lion ($207.2 bil­lion) in March 2012, com­pared to €235 bil­lion ($295.1 bil­lion) in Octo­ber 2009, just before the cri­sis broke. Mean­while some €700 mil­lion ($879 mil­lion) were with­drawn in the week fol­low­ing the incon­clu­sive May 6 election.

The sum­mit also addressed the issue of whether the risk inher­ent in some coun­tries hold­ing so much debt should be spread across the entire euro­zone — issu­ing so-called “eurobonds.” This would mean every coun­try could bor­row funds at the same rate, sub­stan­tially low­er­ing the costs for the more indebted coun­tries. French Pres­i­dent Fran­cois Hol­lande wants the bonds to finance growth projects and ease con­cerns about weaker coun­tries’ debt, but Germany’s Angela Merkel refuses to con­sider such an option.

“It would have been great news,” said Oscar Moreno of Madrid bro­ker­age Renta4. “It would have been good if there had at least been agree­ment to study it. It would have calmed things down and been a very pre­lim­i­nary first step to the idea of a Eurobond. But we got nothing.”

Econ­o­mists say euro­zone lead­ers have to find another way to increase its defenses than offer­ing bailout after bailout to its debt-stricken meme­bers. Javier Diaz-Gimenez, a pro­fes­sor of eco­nom­ics at IESE Busi­ness School in Madrid, said that the euro­zone needs a fun­da­men­tal redesign.

“The solu­tion has to be some change in design,” Diez-Jimenez said. “Some­thing that says, ‘OK, these were the things that were missing.

“Just stag­ger­ing on, that is not going to work. If you keep stag­ger­ing on, you are even­tu­ally going to fall.”

Posted by AP News on May 24 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.