European leaders have cut off aid payments to Greece, saying the country's upcoming referendum on whether to accept a bailout will effectively decide whether the debt-strapped nation remains in the Eurozone. The announcement was made ahead of this week's G20 summit in Cannes, which will be dominated by the European crisis.
In other economic news, the US Federal Reserve has released a gloomier forecast for US growth and unemployment next year. But global trade may receive a boost. Pakistan has decided to normalize trading relations with India, and Russia has reached an agreement with Georgia to allow Moscow to join the World Trade organization.
Bailout aid withheld from Greece
European leaders are withholding €8 billion (US$11 billion) of assistance to Greece, warning the country that it will surrender all European aid if it votes against the bailout package agreed upon only last week.
The latest bailout money was originally agreed for release in the middle of November.
Yesterday, German Chancellor Angela Merkel and French President Nicolas Sarkozy held emergency talks with Greek Prime Minister George Papandreou at the French resort of Cannes, ahead of this week's G20 summit.
Speaking to reporters, Ms. Merkel said: “The referendum will revolve around nothing less than the question: does Greece want to stay in the euro, yes or no?”
Mr. Sarkozy said Greece won’t get a “single cent” of aid if voters reject the plan.
Many in Greece oppose the austerity measures that a bailout package would require. But if Greece does not receive the bailout, it is almost certain the country will default. Mr. Papandreou shocked investors and Europe’s leaders by announcing he would allow his electorate to vote whether to accept the European crisis strategy.
Mr. Papandreou agreed that the referendum would probably also include the question of whether Greece continues to use the euro. But he defended his decision to call a referendum, telling reporters that Greece “needs a wider consensus” for the bailout terms and expressing confidence that voters will back staying in the euro.
Mr. Papandreou's government is also facing a confidence vote in the Greek parliament on Friday.
The Greek referendum will be held on 4 December, earlier than initially suggested. Many economists fear that if Greece were to exit the euro, it could lead to financial contagion, as investors and ordinary bank depositors in other countries that use the joint currency may fear that their own government will follow suit.
But an editorial in the BBC said the latest ultimatum delivered by France and Germany makes it clear that leaders may be willing to let Greece leave the euro. There is a sense in Cannes that Greece is reaching the end of the road, and the priority now must be to contain the damage. Talk is focusing on creating better bailout mechanisms for Europe and finding new funds, but the new money may not be intended for Greece, but rather to protect everyone else from any Greek fallout.
The deal agreed with Athens last week is a key part of a wider strategy to bolster banks and to increase Europe's financial rescue fund in order to help bigger countries such as Italy. But there is now concern that the action plan may unravel.
Struggling to prove his country is credit-worthy, Italian Prime Minister Silvio Berlusconi held an emergency cabinet meeting last night. The cabinet agreed on a budget bill the Italian parliament must pass by 15 November. Steps include increasing the retirement age, easing rules on firing workers and accelerating state asset sales.
The crisis will overshadow today's summit of leaders from the Group of 20 economies. European governments had previously planned to use those talks as a showcase for their revamped strategy and to seek foreign donations to implement it.
Cannes is more used to hosting film stars than government officials. But more than 30 leaders and top financial officials will be meeting in the French resort amid the latest twist in the European debt crisis.
Previously there had been hopes that China might help Europe, but Chinese Vice Finance Minister Zhu Guangyao said yesterday it’s now “too soon” for his country to contribute to Europe's bailout funds.
Europe is China's biggest export market, and a new downturn in Europe would hit China hard. But analysts note the Chinese government is understandably wary about losing if it invests rashly now in the middle of a crisis.
China's official Xinhua news agency called on EU leaders to persuade Greece to "drop the referendum idea" or help them find a "better solution to their political embarrassment".
Indian Prime Minister Manmohan Singh said "much more needs to be done" to restore investor confidence.
That sentiment was echoed by US President Barack Obama's spokesman, Jay Carney. "The events in Greece ... only underscore the need for Europe to come together and to unite behind conclusive action that resolves this crisis," he said at the White House. He added that the US has unique insight on the European financial crisis because of its experience dealing with its own financial crisis. But he made clear that the US has no plans to offer financial support to Europe as China may do.
With Europe's crisis dominating the G20 summit, there is concern that leaders may not focus on other issues such as helping developing economies. As leaders arrive in Cannes, thousands of protesters are gathering to urge the G20 countries to focus on the poor.
Report: Bailout loan withheld from Greece [BBC, 3 Nov 2011]
Report: Greece to Determine Euro Membership in Vote as EU Cuts Aid [Bloomberg, 3 Nov 2011]
Report: Obama heads to G-20 amid questions on Greece [AP, 3 Nov 2011]
Analysis: Greece and the euro: A game-changing summit after all [BBC, 3 Nov 2011]
Analysis: Why China won't save the world [BBC, 2 Nov 2011]
US Growth Forecasts
The US Federal Reserve has slashed its forecast for US growth and upped its expectation for unemployment next year.
The US economy is expected to grow only 1.6-1.7 percent this year, and 2.5-2.9 percent next year - about one percentage point lower than previous estimates.
The jobless rate is expected to stay at 9.1 percent this year. The Fed anticipates unemployment falling only to 8.5-8.7 percent next year. It had previously predicted a fall to 7.8 percent.
Despite this, the Fed voted to keep interest rates on hold and maintain its bond-buying programmes. The decision was entirely what markets and economists expected. Economists say officials seem to feel no sense of urgency to take more action.
However other analysts said the figures show that economic recovery continues to fall short of expectations, and expect further steps to boost the economy, though probably not until early next year.
Report: US Federal Reserve slashes US growth forecasts [BBC, 2 Nov 2011]
Report: Fed releases gloomier economic forecast [San Francisco Chronicle, 2 Nov 2011]
Pakistan Normalizes Trade with India
Over in Asia, Pakistan has agreed to normalize trading relations with India, a move that may help give a boost to talks aimed at improving relations between the hostile neighbours. Pakistan is granting India "Most Favoured Nation" status, a goodwill decision that will likely boost bilateral trade.
Under World Trade Organization agreements, the MFN principle is supposed to ensure that WTO members do not discriminate against one another. India granted Pakistan MFN status in the mid-1990s, but Pakistan declined to reciprocate despite its WTO obligations.
Russia to Join WTO
Russia has reached an agreement with Georgia that paves the way for Moscow to join the World Trade Organization after an 18-year wait. Russia is the only major economy still outside the global trade body.
The WTO operates by consensus, meaning Georgia held a veto over Russia's entry, as the only country opposed to Russian membership. Russia and Georgia fought a brief war in 2008 over the fate of separatist Georgian province. But negotiators have accepted a Swiss proposal where neutral companies will conduct customs checks on all trade between the two countries and audit data.
Both the European Union and the US have voiced hope that Moscow could join the WTO by the year's end, which may provide a much-needed boost to the global economy.
Report: Pakistan Agrees to Normalize Trade With India [Wall Street Journal, 2 Nov 2011]
Report: Russian negotiator says trade deal reached with Georgia, paving way for WTO membership [Canada Business/AP, 2 Nov 2011]