International Economics

In the Eurozone, Indecision is Final

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Wednesday, 05 October 2011 16:53

The FT Deutschland this week reported that Greek Prime Minister George Papandreou was considering resignation. According to one source he feels powerless, because “Greece no longer takes decisions for itself”. The story has since been denied, but if the Greek government isn’t taking the decisions, who is? Not eurozone finance ministers, it seems. On Monday they spent seven hours in a meeting only to conclude that they couldn’t yet reach a verdict on whether the next tranche of Greece’s bail-out should be released or not. This was despite earlier claims from Greece that it needed the €8bn instalment this month, to meet its financing needs.

europeancentralbankWhile the politicians prevaricate, Athens continues to descend into chaos: retired army officers angry at pension changesstorm the defence ministry; civil servants whose jobs are threatened block access to the finance ministry; and strikes and protests continue apace throughout the country. All the time it becomes increasingly clear that the austerity measures are not working. On Sunday Greece admitted it will not meet its deficit reduction targets, and its economy is expected to contract more than previously predicted. Stock markets slide day after day, with the focus currently on the bank Dexia, in trouble because of its eurozone sovereign debt exposures.

The bank, in which both the French and Belgian governments hold a stake following an earlier bail-out, passed stress tests in July, and British chancellor George Osborne has said new tests are now needed before January. It only increases fears about the state of the whole European banking sector – according to theDaily Telegraph one Brussels diplomat said Dexia could be the “canary in the coal mine”. All of which makes it even more remarkable that the only major issue resolved on Monday was satisfying Finland’s demand for collateral in exchange for new loans to Greece, in a deal that analysts said was mostly about political face-saving.

In the last few days non-eurozone countries Denmark, Sweden and the United Kingdom have had their triple-A credit ratings affirmed by Standard & Poor’s. But yesterday fellow rating agency Moody’s followed S&P in downgrading Italy by a massive three notches. It is the first time Moody’s has slashed Italy’s rating since 1993. Surely, soon, eurozone finance ministers will have to do more than just discuss leveraging the European Financial Stability Facility? And do more than merely hint at asking private sector bondholders to take a bigger hit than previously agreed in July in relation to the second Greek bail-out?

On Tuesday the President of the European Central Bank Jean-Claude Trichet made his last appearance in front of MEPs before his term ends and he is replaced by the Italian Mario Draghi. Trichet said the ECB should focus on its primary role of controlling inflation, not act as a lender of last resort. It is up to political leaders, he said, to restore investor confidence in the eurozone. That seems a forlorn hope.

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