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Eurozone ministers say new Greece unity government must commit to austerity; Italian PM refuses to resign

Updated On: Nov 08, 2011

Europe continues to struggle with its financial crisis. European officials have told Greek leaders that their next bailout installment depends on both of the country's main political parties agreeing to tough austerity measures. The parties are in talks to form a new unity government, but the new Prime Minister has not yet been named. Meanwhile, attention is turning to Italy, amid fears the country could be the next to face economic woes, while France has announced its own new austerity package.

Greece to Form Unity Government

Greece's political leaders have been locked in debate over the formation of a unity government they hope can save the country from imminent bankruptcy. Greek Prime Minister George Papandreou is to stand down once the government is formed but his replacement has not yet been confirmed.

The new leadership will be tasked with ratifying a vital EU bailout package. Greece is under huge international pressure to resolve its political crisis, in order to calm the global markets and protect the Eurozone. The country must accept the bailout if it is to avoid going bankrupt by the end of the year. But the deal demands stringent austerity measures and spending cuts which have proved hugely unpopular with many Greeks.

Mr. Papandreou agreed to stand down on Sunday, after days of upheaval caused by his call for a referendum on accepting the bailout. He later retracted the decision. His Pasok party and the opposition New Democracy party have now agreed to form a new joint administration, possibly within a week, with elections on 19 February.

Lucas Papademos, a former deputy president of the European Central Bank (ECB), has been named as a potential interim prime minister. Finance Minister Evangelos Venizelos, considered as another candidate, is expected to remain at the finance ministry.

Report: Greek politicians in talks over PM and unity government [BBC, 7 Nov 2011]

Report: Ex-central banker front-runner to become Greek PM [Reuters, 7 Nov 2011]

Euro Group Talks

European officials have told Greece’s two main political parties they must co-sign a letter pledging support for the country’s bailout terms in order to secure an €8 billion loan needed to stave off default.

Jean-Claude Juncker, the head of the Eurozone's governing body of 17 finance ministers, made the announcement after talks on Monday. Mr. Juncker, who is also the current Prime Minister of Luxembourg, said although European ministers welcomed the deal to form a coalition government in Greece, Greek acceptance of a tough austerity program was still a precondition for payment of the loan.

Mr. Juncker also urged Italian authorities to begin the economic reform measures pledged by Italian Prime Minister Silvio Berlusconi last month.

Expanding the EFSF

At their meeting, the European finance ministers also discussed the technical details of expanding the firepower of their bailout fund. Eurozone leaders have agreed in principle to boost the European Financial Stability Facility (EFSF) from €440 billion to €1 trillion, including investment from outside Europe. But the Dutch minister, Jan Kees de Jager, said the discussions of the exact steps to achieve this remained a “work in progress.”

But British Prime Minister David Cameron warned on Monday that the International Monetary Fund (IMF) would not finance any rescue deal. Britain is not part of the shared euro currency. Over the weekend, Canadian Finance Minister Jim Flaherty also expressed this view, saying the IMF's funds, and those of China and Brazil, ought to be saved for crises that could afflict the developing world. "The euro zone countries are relatively rich in world terms and have the tools and resources themselves," Mr. Flaherty told the Financial Times. "These are wealthy countries who’ve got to have, and do have, the means to deal with their own problems."

However, Japan has expressed some support, buying 10 percent of the €3 billion in bonds issued on Monday by the EFSF. The percentage is smaller than the roughly 20 percent share that Japan bought at three previous auctions, but should be welcome news for EFSF as it saw weaker demand for the latest issue and had to offer a higher yield to attract investors.

Japan's continued purchases also contrast with China, which had bought the bonds previously, but has remained noncommittal so far about future purchases.

Report: Euro Zone Urges Greek Parties to Commit to Bailout Terms [New York Times, 7 Nov 2011]

Report: David Cameron: Eurozone must sort itself out [BBC, 7 Nov 2011]

Report: Canada's tough love to Europe: Don’t look to us for a bailout [The Globe and Mail, 7 Nov 2011]

Italy

Meanwhile, Italian Prime Minister Silvio Berlusconi is set to face a crucial vote on his country's budget, amid fears that Italy could be the next victim of the Eurozone debt crisis.

Borrowing costs for Italy's government have soared because of fears it may be unable to repay its huge debts. On Monday, Mr. Berlusconi made a Facebook post dismissing reports he planned to resign.

There is speculation that Mr. Berlusconi no longer has a majority in parliament, after reports that some MPs from his government have defected. But Mr. Berlusconi, who has survived many previous confidence votes against his administration, insists that he has all the support he needs.

With Greece's problems now widely known, Italy is moving to centre stage in Europe's debt crisis. The size of the Greek economy is small enough that the direct damage if Greece stopped paying its debts should be manageable for the Eurozone. Instead the fear is contagion - a Greek default could trigger wider consequences for other economies.

Although Italy does not have that much debt compared to other countries, Italy's economy is very weak. Italy is plagued by poor regulation, vested business interests, an ageing population, and weak investment, all of which have conspired to limit the country's ability to increase production. The country has averaged a 0.75% annual economic growth rate over the past 15 years, much lower than the rate of interest it pays on its debts.

Report: Italy's Berlusconi faces key vote amid economy fears [BBC, 8 Nov 2011]

Analysis: What's the matter with Italy? [BBC, 7 Nov 2011]

Meanwhile, France has outlined its second austerity package in less than three months, as the country battles to rein in its budget deficit and safeguard its prized triple-A credit rating.

French President Nicolas Sarkozy is taking a gamble by imposing further austerity just months before next spring's elections. But last month, Moody's Investors Service warned that the outlook on France's triple-A rating is under pressure, citing the possible need to support other European nations or its banking system. Although austerity measures will be unpopular, Mr. Sarkozy cannot afford a downgrade for France.

France's austerity measures come a day after Germany Chancellor Angela Merkel's ruling center-right coalition said it plans to cut income taxes for low- and middle-wage earners, demonstrating the divergence in fiscal strength of the Eurozone’s two largest economies.

Report: France Announces New Austerity Plan [Wall Street Journal, 8 Nov 2011]







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