The eurozone crisis escalated this week as Greece moved closer to leaving the euro and Spain’s borrowing costs increased dramatically. Yields on two-year Spanish bonds hit fresh euro-era highs of over 7% on Wednesday. Global markets were spooked, with the FTSE 100 down 2%, the German Dax down 1.6% and Hong Kong’s Hang Seng down 2.8% on Monday.
The ‘troika’ of international lenders (the International Monetary Fund, the European Central Bank and the European Commission) meets in Athens to decide whether Greece’s austerity programme is meeting bail-out targets. The country will only receive a €31bn loan payment in September if officials give the go ahead.
However, Germany’s patience is wearing thin. Philipp Rösler, Germany’s economic minister, said that if Greece fails to comply “there should be no more payments”. Prime Minister David Cameron has been warned that Greece could go bankrupt by 20 August if it does not receive the payment. Meanwhile, the cost of Italy’s debt has hit the highest level since Mario Monti became prime minister last autumn.
What the commentators said
Germany has “taken the decision to expel Greece from the euro”, whatever its new government does, said Ambrose Evans-Pritchard in The Daily Telegraph. Greece has missed 210 troika-imposed targets. It’s no surprise; the troika said the economy would contract by 2.6% in 2010 under austerity, recovering with growth of 1.1% in 2011 and 2.1% in 2012. Instead, it contracted by a further 6.9% in 2011 and will shrink by 6.7% this year. So it “misjudged” the decline over three years “by 12% of GDP”. What Mr Rösler “really means” is “Germany is not willing to spend taxpayer’s money on Greece”.
The “dominant role” played by the ECB and international agencies hasn’t “ended the debt crisis”, said Komal Sri-Kumar in the FT. Governments must “allow a greater role for market forces”. The “principal weakness” of the periphery is “not large fiscal deficits but high labour costs”. Freer wage negotiations are needed and youth unemployment must be cut. Governments should take a leaf out of the “corporate bankruptcy handbook” and settle with their creditors.