Euro crisis: “And all bets are off if Europe does not start to grow again…”

At the Guardian’s business blog, Graeme Wearden is live-blogging the European debt crisis, as the “OECD predicts some negative growth in eurozone in 2012… and calls for “bold” action from the G20, Italian bond yields hit 6.13%, Markets fall as bailout deal euphoria peters out, [and the] Euro crisis drags MF Global to the brink“.

Meanwhile BBC Europe editor, Gavin Hewitt, considers “Europe after the euphoria”

Maybe it was the lack of sleep, or that expectations had been exceeded, but there was a whiff of triumph in the post-summit statements at 4am last Thursday.

The heady comments continued into the day, with French Finance Minister Francois Baroin declaring that “the euro has been saved”.

Inevitably, a more sober assessment has followed. It is not so much that nothing was achieved – it is more that no one is quite certain what will sustain. The agreement has left a whole raft of questions.

After asking “Will the banks volunteer for 50% losses?” [Probably not? – Ed] he goes on to note

Few believe that Greece will be able to deliver on its commitments, and further funding will be required. Even on the best-case scenario debt will only fall to 120% of GDP by 2020. Greece is staring down a long road of hardship.

Then there’s the EFSF – the eurozone’s main bail-out fund. It has been ramped up (leveraged), or so we are told, to one trillion euros – but no one can explain how the EU gets to that figure. The Europeans are not putting in more of their money. An expanded fund will be hugely dependent on China, Russia, the IMF, and they have yet to declare their hand.

And

So on to Italy. The fund – even at a trillion – is not enough to protect Italy if it gets into difficulty. Its borrowing costs are currently unsustainable. Next year it needs to finance 300bn euros of its 1.9tn euro debt.

Silvio Berlusconi arrived at the summit with a 14-page letter of promises to reform the Italian economy. “Will Italy do what it promised?” asked the German Finance Minister Wolfgang Schaeuble. It did not boost confidence in the Italian leader when he referred to the euro as a “strange currency” that had “not convinced anyone”. Even if Silvio Berlusconi has the will to reform does he have the credibility to push change through?

There is a very real danger that the Italians – like the Greeks – will resist cuts in wages and benefits.

And all bets are off if Europe does not start to grow again. Certainly the indications are that next year the European economy will shrink.

His final point is worth emphasising

A step has been taken towards solving the eurozone crisis, but it is stirring deep questions – not just about the debt crisis but about the future of the European project itself.

And as I may have mentioned

It’s still“the political trilemma.” 

[Europe is still sexy! – Ed]  Of course it is.

And, as I’ve been saying, for supporters of the “European Project”, the options are stark.

And when it’s that serious, you have to lie…

But read Gavin Hewitt’s whole post.

Update  According to a BBC report

Greece will hold a referendum on a new European Union aid package intended to resolve the country’s debt crisis, Prime Minister George Papandreou says.

Mr Papandreou said a vote of no-confidence would also be held on the deal – but no dates were set.

It’s certainly one way to decide whether the euro stands or falls…  No sign of a response from Frau Bundeskanzlerin.  Yet.

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  • DC

    The SOCA idea is up and running, well in the form of an e-petition:

    http://epetitions.direct.gov.uk/petitions/20658

    Get signing – including you Pete Baker.

    This is one way to offset negative growth. Call it ‘Re-redistribution’ that is to say government intervenes and takes money back off the bankers and puts their money back into the banks. Correcting a market failure if you like.

  • Pete Baker

    Update According to a BBC report

    Greece will hold a referendum on a new European Union aid package intended to resolve the country’s debt crisis, Prime Minister George Papandreou says.

    Mr Papandreou said a vote of no-confidence would also be held on the deal – but no dates were set.

    It’s certainly one way to decide whether the euro stands or falls… No sign of a response from Frau Bundeskanzlerin. Yet.

  • thethoughtfulone

    Even mega-cynical me thought it would take more than a week for the wheels to come off, I thought they’d get through the impending G20 meeting at least even though it’s been a case of “when” rather than “if” since the announcement of what was actually “achieved” was made.

    It seems the Greeks want to default and increasingly I think they’d be doing the world a favour if they did. Whatever sort of shit storm is brewing out there needs to come to a head so that any future effort is put into sorting out the aftermath rather than trying to avoid it in the first place.

  • Pete Baker

    As the Guardian’s Nils Pratley notes

    The first response is to applaud an outbreak of democratic spirit, a quality in short supply across the eurozone as the debt crisis has raged. The second response is to wonder how investors, who were already starting to question the solidity of last week’s grand three-part rescue plan for the eurozone, will take this latest twist in the tale. Extremely badly, one suspects.

    And as he goes on to say

    …this plot threatens to become messy.

    Indeed.

  • Greek Government has nothing to lose by setting a referendum in motion.

    The Greek Government knows that too many in its country will not tolerate the austerity measures without some greater moral authority. Winning a referendum might just provide sufficient inspiration for enough of the Greek population to stick with the plan.

    A default is still more likely though and the rest of Europe knows it. The Greek tragedy has already been discounted. What really worries them is Italy and the fact that that only Italy itself can do what is necessary to prevent an economic meltdown. The trouble is that doing what is necessary may be too high a price for the Italians. As this post points out, there is no or little prosepct of economic growth in Europe over the next few years.

  • vanhelsing

    Most economists agree that the Greeks will default – it’s just a question of when and how. The managed default is what most EU leaders would prefer and it looked likely they could pull this off – perhaps until this referendum.

    What the markets don’t like is uncertainity and this is exactly what the ref will provide. I’m not saying they shouldn’t have it – it’s just a schoolboy errior in a macro-political sense. I’m also not sure what the hellenic parliament hope to achieve.

    Option 1. Greeks support the government [unlikely] but a significant vocal majority continue to protest – perhaps to the point of civil unrest. Some stability in markets perhaps allow managed default.

    Option 2. Greeks vote against package. Government ignore ref? or go back to Drachma [in complete default] with [nearly] unthinkable economic consequences.

    Little simplistic but don’t really see what the government seek to gain here…