Weak governments in Greece and Italy now threaten the eurozone’s strategy for shoring up the single currency.
Dysfunctional decision-making once again threatens efforts to salvage the single currency, confirming the judgement of both friends and enemies of the euro who say that it cannot survive without stouter political leadership and more credible democratic foundations.
For much of the past year, it was doubts about Germany’s commitment to the euro that hobbled efforts to shore up the single currency in the face of Europe’s debilitating sovereign-debt and banking crises.
But on Monday night (31 October), only days after a eurozone summit in Brussels had patched together a revised crisis-management strategy, it was Greek Prime Minister George Papandreou, the head of a divided government, who recklessly put the summit’s conclusions in doubt.
By calling a parliamentary vote of confidence for tomorrow (4 November) and then, if his government survives the week, for a referendum on the latest bail-out package for his country, Papandreou discredited the eurozone’s latest attempts at crisis management.
Sharp falls in share prices in the United States and across Europe followed. The yields on embattled Italy’s government bonds were sent surging through the 6% mark, a level widely seen as critical to maintaining confidence in the sustainability of Italy’s vast government debt and so in its longer-term economic prospects.
With a quiet run on Greek banks already under way, as sophisticated private customers move their money to more stable institutions elsewhere in the eurozone, Papandreou’s decision to roll the political dice could drive his country into the destructive, disorderly default that Germany’s Chancellor Angela Merkel and French President Nicolas Sarkozy were struggling to prevent.
Before Papandreou announced his gamble, it had been hoped that the G20 meeting in Cannes today and tomorrow (3-4 November) might lay the foundations for more broadly based international financial support for Europe’s stressed sovereign debtors, perhaps from China, India, Brazil and Russia.
For weeks, Eurozone officials have been engaged in efforts to increase the financial resources behind Europe’s sovereign-debt support schemes by, for example, encouraging these countries to support directly the European Financial Stability Facility (EFSF) bail-out mechanism, or indirectly by channelling help through the International Monetary Fund (IMF).
The immediate impact of the Greek referendum announcement was to sow doubts about both the new crisis-management strategy and international help for the single currency. Jacques Cailloux, the chief European economist at Royal Bank of Scotland, warned that the prospective Greek referendum was “a major negative for Greece and the rest of the monetary union”, adding that it would probably “block any new potential financial support from countries outside the monetary union to the EFSF”.
If the likes of China and Brazil hesitate, who can blame them? The political turmoil in Greece is threatening the euro even as the eurozone’s biggest potential headache, Italy, remains unresolved.
The public, and ill-judged, humiliation heaped upon Italy’s Prime Minister Silvio Berlusconi by Merkel and Sarkozy at the summit of 24 October, could not have signalled more clearly eurozone policymakers’ unspoken wish: they want – somehow, anyhow – Italian voters to be given the
chance to replace Berlusconi’s government, now deemed incapable of implementing the economic reforms needed to revive Italy’s long-term economic prospects.
Regime change in Italy is also seen as something the European Central Bank (ECB) may be encouraging, as it fine-tunes its purchases of Italian government bonds.
On this view, nothing would do more to take the pressure off Italy, and to ease the wider eurozone sovereign-debt and banking crisis, than a new Italian government committed to the economic reforms without which Italy’s economy will continue to present a mortal threat to the single currency.
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Mario Draghi, the newly installed president of the ECB, who chairs his first meeting of the governing council today, has every incentive to take a tough line with his Italian countrymen. To do otherwise would quickly undermine the credibility of his leadership of an already divided institution. The ECB’s governing council is deeply split both about the support that the central bank gives to Italian bonds in the secondary market and about setting the conditions on which this support is provided.
Businessmen, too, are running out of patience with the Italian government’s dithering. On Monday, Luca di Montezemolo, the chairman of racing-car manufacturer Ferrari, previously chairman of the politically powerful Fiat group and president of Confindustria, the Italian employers’ association, called for the creation of a government of national salvation.
Such a sense of urgency is not confined to Italy. It took hold more generally in Europe, albeit belatedly, at the annual meeting of the IMF in Washington, DC, in late September.
There, eurozone governments at last recognised that time was running out if they were to save the single currency, not least because of a sudden deterioration in the global and European economic outlook. That deterioration was confirmed this week by the OECD, the Paris-based think-tank for rich countries. In forecasts prepared ahead of the G20 summit, the OECD projected that, instead of expanding by 1.6% in 2012, as it had earlier predicted, growth in the eurozone would peter out, limping at best 0.3% higher.
Faced with this outlook, and with the evidence that their 21 July initiatives had failed to restore confidence, eurozone governments had moved at last week’s meetings to reinforce the debt strategy. Initial reactions were positive. But experts remained uneasy. “The ‘Grand Plan’ is sorely lacking in detail,” wrote Stephen King, the chief economist at HSBC, an international banking group. Within five days, that guarded assessment had been overtaken by events.
Stewart Fleming is a freelance jourmalist based in London.