ATHENS – As speculation intensified that Greece would default, the crisis that has gripped the country for 18 months, setting off protests and riots over government-imposed pay cuts, tax hikes and slashed pensions to satisfy international lenders putting up $152 billion in emergency rescue loans, fears grew that if Greece falls, so too will the 17 members of the Eurozone using the euro as a currency.
European Commission President Jose Manuel Barroso told a meeting of the European Parliament in Strasbourg, France: “We are confronted with the most serious challenge of a generation …. this is a fight for the economic and political future of Europe. This is a fight for what Europe represents in the world. This is a fight for European integration itself.” Europe’s big trading partners – the U.S. and China – also said they want the crisis contained even as it continued to spiral out of control.
German Chancellor Angela Merkel, struggling to convince her citizens and the Eurozone to keep supporting Greece, had to reprimand her Economy Minister and Vice-Chancellor, Philipp Roesler, after he stoked fears of an imminent Greek downfall and possible domino effect on other economically weakened countries including Spain, Portugal, Ireland, and Italy, when he said “an orderly bankruptcy of Greece,” has to be considered. That set off jitters in the markets that Greece’s default, which many analysts see as a mathematical certainty even as European Union leaders try to find a political solution.
The EU, along with the International Monetary Fund (IMF) and European Central Bank, is putting up the rescue money, and has promised a second bailout of $157 billion, but only if Greek Prime Minister George Papandreou makes further deep cuts and tax hikes, although the first round has backfired and created a deep recession and a 7.3% shrinkage in the country’s Gross Domestic Product, more than 16% unemployment, more than 65,000 businesses shuttered with more closing every day, and an inability to recover because Greece is tied to the euro and has an uncompetitive economy.
All that has created increasing tension in the EU, which has 27 members, 10 of which do not use the euro. Merkel and French President Nicolas Sarkozy, during a teleconference call with Papandreou on Sept. 14, told him that Greece remains an “integral part of the Eurozone” despite growing talk Greece will fail, government spokesman Ilias Mossialos said. “Despite the recent rumors, all sides emphasized that Greece will remain in the eurozone,” Mossialos told state TV channel NET. He said Merkel and Sarkozy said the new imposition of a property tax on Greek residents was enough to insure the next loan installment of $11 billion would be released, although it would raise less than $3 billion, Greek officials estimated – and only if it’s collected in a country where tax evasion is rampant. Finance Minister Evangelos Venizelos said the tax would be included in electric bills to guard against non-payment.
The Athens newspaper Kathimerini said Papandreou told Merkel and Sarkozy he would speed the pace of further pay cuts and tax hikes and privatization of state-run and owned entities and properties to raise $71 billion, although that could cost Greece what few money makers it has, such as the highly profitable Hellenic Petroleum. American and European officials also tried to calm markets and end speculation that the Eurozone itself was in danger. European Economic Affairs Commissioner Olli Rehn said that “a default or exit of Greece from the Eurozone would carry dramatic social, economic and political costs… not only for Greece, but also for euro-area member states, other EU states, as well as global partners.”
US Treasury Secretary Timothy Geithner, who is to attend a summit of EU leaders in Poland on Sept. 16, said he was confident that Europe could overcome its debt crisis. “The people who are concerned that this is beyond their grasp are mistaken. The size and the challenges that they face economically are completely within the capacity of the stronger European members to manage,” he said, adding however that “they are going to have to do more” and “move quickly.”
Reuters reported that IMF officials who were not involved in an informal talk at the agency on Sept. 14 said that that this was Greece’s last warning and that a scheduled December loan installment would be more difficult to arrange unless budget targets are met. “I think this is Greece’s last chance,” one of the officials said. “If promised reforms are not implemented by the next review in December, things for Greece will become much more difficult with the next loan tranche far from certain. The Greek government knows that emergency measures like new taxes can only get them to a point before the population reacts in a dramatic way. They need sustainable measures with a smaller public sector where everyone is paying his fair amount of taxes. Only then the country can return to a sustainable path,” the official said.