Fragility of eurozone rescue plan exposed
The leaders of the eurozone are facing a crucial week as they struggle to calm financial markets and shore up a deal reached before the summer break.
Finance ministers from all 27 member states of the European Union are to meet in Wroclaw, Poland, on 16-17 September, by which time they hope to have settled disagreement over Greece’s new €109 billion bail-out, where outline was agreed on 21 July.
Officials from the eurozone countries have not yet resolved arguments over a bilateral deal that would see Finland receive collateral from Greece in return for its participation in the rescue. Any collateral arrangement has to be approved by all members of the eurozone.
Amid increasing pressure to finalise a deal, the finance ministers of Germany, the Netherlands and Finland met on Tuesday (6 September). However, Jan Kees de Jager, the Dutch finance minister, said afterwards that there were still “technical” problems to overcome.
Yesterday (7 September), Jyrki Katainen, Finland’s prime minister, said that the problem needed to be resolved “in the next few days”, adding that there was still a possibility that Finland might not take part in the second Greek bail-out if there was no resolution.
The financial markets’ verdict on the eurozone’s travails continues to worsen. The yields on ten-year Greek government bonds rose yesterday above 20% for the first time since the creation of the euro. Italian bond yields also soared on Monday, though they eased yesterday after revised austerity measures were presented to the country’s senate by the centre-right government of Silvio Berlusconi.
Italian MPs will vote in the next few days on the programme, which was amended this week following critical reactions from the European Commission and European Central Bank (ECB) to an earlier version that had dropped previous savings promises. Berlusconi was to face a vote of confidence in the Italian senate last night as European Voice went to press.
Yesterday, the Commission welcomed the U-turn, saying that the new measures “confirmed the determination of the Italian authorities to meet the agreed targets of deficit and debt reduction”.
Italy’s borrowing costs also fell earlier in the day, helped by a ruling by Germany’s constitutional court that Germany’s participation in the Greek rescue was legal.
However, the court ruled that in future the budget committee of the Bundestag, Germany’s parliament, would have to give its approval before the country participated in any bail-out. This might mean that decisions to help eurozone countries are slowed down.
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“The court decision, while not a disaster, will doubtless slow an already glacial crisis-management process down even further,” said Sony Kapoor, managing director of Re-define, a Brussels-based think-tank.
On Tuesday night, Evangelos Venizelos, Greece’s finance minister, said that job cuts and a new privatisation programme would be implemented in the coming days, after warnings that loans to the troubled country could be blocked because of delays.
Yesterday, the Commission announced that a team of officials from the three organisations involved in the bail-out discussions – the Commission, the International Monetary Fund and the ECB – would return to Greece later this month.
The troika had withdrawn on Friday (2 September) over Greek authorities’ lack of progress, and on Tuesday Wolfgang Schäuble, Germany’s finance minister, warned that without troika approval Greece would not receive the next tranche of its bail-out loan.
The currency markets have become another front in the eurozone’s difficulties. This week, the Swiss central bank announced that it would intervene to keep the Swiss franc from rising too high against the euro, which was seen by the markets as likely to trigger further currency competition.
Today, the governing council of the ECB will meet and is expected to signal an end to the recent trend of raising interest rates, amid concerns about feeble growth in the eurozone economy. Jean-Claude Trichet, the ECB president, is also expected to face questions about the bank’s controversial purchasing of government debt to protect Italy and Spain.