Europe’s sovereign debt crisis has moved into a critical new phase with the admission for the first time that the referendum planned in Greece could result in the country leaving the monetary union.
The four members of the eurozone attending the G20 summit 2011 – Germany, France, Italy and Spain – were holding talks in Cannes this morning to discuss what to do next. Unsurprisingly, the mood was grim.
Splits were appearing in the Greek cabinet, Italian bond yields were rising after Silvio Berlusconi’s cabinet came up with no new proposals for tackling Italy’s debts and for the first time European leaders have had to confront their worst nightmare: the euro may break up.
Nicolas Sarkozy, Angela Merkel and their fellow leaders have known for the past two years that Greece has had a big problem with the debts accumulated during the first decade of the single currency’s life. But up until now they have insisted that monetary union was permanent, with no mechanism in place for a country that wanted to leave.
The bombshell dropped by George Papandreou this week has changed all that. With a Gallic shrug, Sarkozy said after his frosty talks with the Greek premier: “It is up to them to decide if they want to stay in the euro with us.”
Merkel agrees with Sarkozy, as does Jean-Claude Juncker, who in addition to being prime minister of Luxembourg is president of the 17-strong Euro Group. “I am very decidedly of the opinion that everything must be done so that one euro country does not leave the 17 but if that were the wish of the Greeks, and I would find that wrong, we cannot force the Greeks.”
The tough language is being backed up by action: the Greeks will not get the next tranche of their bailout money until the referendum is over.
For a government living from hand to mouth, the loss of this €8bn payment – even if only temporary – is a serious matter for the Papandreou administration. Greece could go bust even before the vote is held.
Clearly, the intention is to put the frighteners on the Greek public so that they vote yes if and when the time comes for them to decide whether to accept the bailout package agreed in Brussels last week. This tactic could work, because the polls have shown little appetite in Greece for leaving the euro. In any event, Papandreou may not survive tomorrow’s parliamentary vote of confidence, which would probably result in the referendum being called off. Greek bank stocks were rising this morning on speculation that the prime minister would be out before the weekend.
This is now a game being played with the highest of stakes. Megaphone diplomacy is now the order of the day, with the ultimatum from Sarkozy and Merkel serving to ratchet up the tension. Economists at bodies such as the Organisation for Economic Cooperation and Development and the International Monetary Fund have already downgraded their forecasts in anticipation of a European recession caused by the “muddling through” strategy of the past two years. Now they are being forced to model what would happen in the event of a disorderly Greek exit from the euro, with the inevitable knock-on effects that would have.
A successful outcome to the crisis – a quick resolution to Greece and an immediate reduction of the tension on Italy and Spain – is highly unlikely. The UK thinktank, the National Institute for Economic and Social Research, today came up with a number of alternative scenarios: muddling through, default contagion and a Greek exit from the euro. None of them will be remotely pleasant.
Source: Gurdian UK