The euro slid and stocks across Britain and Europe hit their lowest levels this year as political upheaval engulfed the eurozone. France’s new president François Hollande reiterated his anti-austerity message after Sunday’s victory. His election had been widely expected. Greece’s parliamentary election result, however, hadn’t. The established parties who back the bail-out of Greece by the European Union and International Monetary Fund mustered less than a third of the vote. A far left group that has described the austerity package as “barbarous” was trying to form a government this week.
A Greek default and exit from the eurozone looks likely. Meanwhile, the Spanish government, having previously insisted that no more state money would be needed to prop up its banks, is set to inject billions into Bankia, Spain’s third-biggest bank.
What the commentators said
“The political dam has broken in Europe,” said Ambrose Evans-Pritchard in The Daily Telegraph. The German agenda of austerity and structural reforms no longer has enough allies among EU leaders to prevail. Popular fury at the downward economic spiral exacerbated by belt-tightening has “radically altered the balance of power”.
Now “Italy may start to tuck in behind France”. The party of former premier Silvio Berlusconi wants the German-inspired fiscal pact – which insists on balanced budgets – to be softened. Its assent is needed before Italy can ratify the pact. The eurozone’s political outlook is murkier than ever.
In the meantime, the old economic problems remain. The Bankia bail-out confirms suspicions that “Spain has not admitted to itself just how weak some of its banks actually are”, as one adviser to the government and the local banking sector told the Financial Times. Property prices are down 12.5% in the year to April, according to the country’s biggest home appraisals firm.
Banks have around e340bn of exposure to property developers, as Fxpro.com pointed out. With prices falling and the recession getting worse, bank losses are sure to rise. Overall loan delinquencies are already at an 18-year high. With the weakness of the banking system set to load more debt onto central government, said Hamish McRae in The Independent, it’s “pretty much inevitable that Spain will need some sort of bail-out”.