Merkel tells Greece to back cuts or face euro exit

truther May 15, 2012 0

Greece may be forced to leave the euro if the country refuses to implement spending cuts agreed with the European Union, Angela Merkel warned.

Raising the spectre of a Greek exit, the German chancellor said “solidarity for the euro” was threatened by the ongoing political crisis in Athens.

Stock markets around the world fell sharply with fears mounting that a euro break-up could lead to renewed financial turmoil. The FTSE-100 index of Britain’s major companies fell by two per cent to 5465, with bank shares hit particularly hard.

The cost of Spanish government borrowing also hit a record high since the single currency was introduced because of concerns that the crisis will spread.

Today, François Hollande, the new French president, will be sworn in and, in an indication of the concern gripping Europe, will almost immediately travel to Berlin to hold talks with Mrs Merkel that will be dominated by Greece’s plight.

Attempts to form a new government in Athens have been thwarted for the past nine days, although the country’s president will meet all major parties this afternoon to discuss the forming of a “technocratic” administration rather than a coalition.

An outgoing Greek minister warned that the country could descend into “civil war” amid the chaos of a euro exit. “If Greece cannot meet its obligations and serve its debt the pain will be great,” Michalis Chrysohoidis was quoted as telling a local radio station. “What will prevail are armed gangs with Kalashnikovs and which one has the greatest number of Kalashnikovs will count … we will end up in civil war.”

New elections may be held next month and Greek voters are likely to be warned by European leaders that their country may be ejected from the euro if they do not support parties backing austerity measures.

George Osborne, the Chancellor, travelled to Brussels yesterday to take part in meetings with other European finance ministers about the worsening crisis.

Speaking on arrival, he said: “The eurozone crisis is having a real impact on growth across Europe.

“The British recovery has been damaged over the last two years not by Britain getting a grip on its public finances but by uncertainty in the eurozone. It is that uncertainty, not austerity, that is doing the real damage to the European recovery, and indeed the British recovery.”

Today, Mr Osborne may agree to looser banking rules, stipulating how much money banks must keep on their balance sheets, to allow more flexibility in responding to the turmoil.

A report from Fitch, the credit rating agency, said yesterday that the British economy may not re-emerge from recession before 2014 if there is a “shock case” of a disorderly Greek exit from the euro.

Germany and the European Central Bank are thought to have drawn up detailed plans for a Greek exit for the euro. They are designed to stop it provoking panic in other vulnerable countries, particularly Spain and Ireland. However, this is fraught with difficulties, particularly if Greece refuses to take part in an “negotiated exit”.

Yesterday, Mrs Merkel raised the spectre of Greece leaving the euro. She is under increasing pressure in Germany to force the country out of the single currency to avert several more years of uncertainty. “I believe it’s better for the Greeks to stay in the euro area, but that also requires that we set out a path on which Greece gets back on its feet step by step,” said the chancellor.

“The solidarity for the euro will end only if Greece just says, ‘We’re not keeping to the [austerity] agreement.’ But I don’t expect that to happen. I do think they are making an effort. There are many, many people in Greece who actually want it.”

Wolfgang Schaeuble, the German finance minister, added: “We have a very nervous situation in the eurozone.”

He said the advantages of Greece staying in the euro outweighed any perceived gain from exiting the single currency. “But it will be strenuous,” he said. “The price if they decide to leave the euro is very high. It would cause a huge amount of turbulence for all of us.”

The British Government is largely watching the euro turmoil from the sidelines and has not seen the details of contingency planning in Germany. Ministers are relatively confident that British banks would not be hit too hard directly by a Greek meltdown, but the indirect impact of how this would spread through the global financial system are far less certain.

The Foreign Office also has plans to evacuate British citizens from Greece if it becomes dangerous. A government source said: “The situation is now political rather than economic so is out of our hands. We are well prepared to help protect British citizens from the storm.”

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