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French Employment Minister Michel Sapin made it clear that his government’s tax-and-spend policies are just not working and admitted that France is bankrupt.
Just half a year since his party came to power, Michel Sapin told radio listeners: “There is a state but it is a totally bankrupt state.
“That is why we had to put a deficit reduction plan in place, and nothing should make us turn away from that objective.”
While the admission was unlikely to have been intentional, it highlighted huge concern at Socialist President Francois Hollande’s handling of the economy.
Since Francois Hollande came to power, unemployment and the cost of living have continued to spiral in France, while “anti-rich” measures have provoked entrepreneurs to leave the country.
Francois Hollande is currently trying to revive France’s economic fortunes by cutting spending by the equivalent of more than $80 billion.
The president has also pledged to increase taxes by $30 billion over the next five years.
Shrinking economies make it difficult for eurozone countries to get debt levels under control despite pushing through harsh spending cuts and reforms because shrinking output makes the value of a country’s debt as a proportion of the size of its economy worse.
Last week the IMF downgraded its growth forecast for the eurozone from 0.1% to a minus 0.2% contraction, warning that the eurozone “continues to pose a large downside risk to the global outlook”.
The Bank of France has already produced data showing that capital investment is leaving the country every day, along with the business people who helped to build it.
French Employment Minister Michel Sapin made it clear that his government’s tax-and-spend policies are just not working and admitted that France is bankrupt
Among those who have moved their vast wealth out of France is Bernard Arnault, the country’s richest man.
Bernard Arnault, the 63-year-old head of luxury goods group LVMH, insists that he moved the cash and assets to Belgium for “family inheritance reasons”.
But others are convinced that, like numerous other tycoons and celebrities, he simply wants to avoid taxes including a 75% top rate on income being introduced by President Francois Hollande.
Bernard Arnault, who owns numerous homes around the world including one in London, applied for a Belgian passport soon after Francois Hollande’s Socialists won presidential and parliamentary elections last year.
Earlier this year, actor Gerard Depardieu became another high-profile Frenchman moving his assets abroad.
Gerard Depardieu obtained a Russian passport, bought a house in Belgium, and put his multi-million dollars Paris town house on the market.
There have even been reports that Nicolas Sarkozy, the last President of France, is preparing to move to London with his third wife, Carla Bruni, to set up an equity fund.
Prime Minister David Cameron has already said that Britain will “roll out the red carpet” to attract wealthy French people.
Pierre Moscovici, France’s finance minister, immediately tried to play down Michel Sapin’s comments, saying they were “inappropriate”.
He said: “France is a really solvent country. France is a really credible country, France is a country that is starting to recover.”
France is Europe’s second-largest economy and is suffering from rising unemployment, with figures up 10% on last year.
Meanwhile Greek opposition leader Alexis Tsipras said Europe must abandon austerity policies and hold a summit to make Greece’s debt sustainable.
Alexis Tsipras said a conference similar to the one that brought debt relief to Germany in 1953 is the only way to solve their financial crisis.
Greek GDP fell 6% in 2012, the lowest in Europe, as the country struggled with the financial crisis. Portugal’s GDP fell 3%, while Italy declined by 2.3% and Spain’s GDP shrank by 1.4%.
The French GDP rose by 0.2% last year while Ireland grew up 0.4% and Germany increased by 0.8%.
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The European Union is due to begin a two-day summit in Brussels that will focus on issues surrounding the eurozone crisis.
High on the agenda will be controversial plans for a eurozone banking union, seen as a key element in restoring confidence in the euro.
In the run-up to the summit, Germany has been urging EU states to consider pooling more economic sovereignty.
Meanwhile Greece, which is at the centre of the European debt crisis, is braced for another general strike.
It will be its 20th since the debt crisis erupted in the country two years ago.
Talks in Brussels are also expected to focus on banking supervision, stricter fiscal oversight and direct recapitalization of banks from rescue funds.
The summit will take place amid calmer European stock markets than in previous meetings and with less concern over the debt crises in Spain and Greece, analysts say.
Speaking on Wednesday, French President Francois Hollande said an end to the eurozone crisis was “very close” and he wanted a deal agreed on the first stage of a banking union.
German Finance Minister Wolfgang Schaeuble has proposed a full fiscal union – control at European level of tax and spending.
On Wednesday, Wolfgang Schaeuble said that eurozone countries “need to tackle problems themselves”, adding that the eurozone bailout fund was there to help countries do just that.
But he reiterated his view that further steps towards political integration would strengthen the bloc.
The meeting in Brussels will be the fourth time that leaders of the EU’s 27 nations have met this year.
Borrowing costs for struggling eurozone economies have fallen sharply since the European Central Bank (ECB) announced last month that it was prepared to buy their bonds in unlimited amounts under strict conditions.
The calmer economic climate is being used to discuss buttressing economic and monetary union, and little will be agreed at this summit.
On Wednesday, Greece and its international creditors are said to have reached a deal on austerity measures needed before its next bailout installment.
Nevertheless, large demonstrations are planned across the country against the next package of spending cuts.
Taxi drivers, ferry workers, doctors, teachers and air traffic controllers are among those taking part in a general strike across the public and private sectors.
Germany has called on countries using the euro to take decisive steps to bring about closer fiscal integration.
Berlin wants the EU’s 27 countries to consider pooling more economic sovereignty at a summit in Brussels which begins on Thursday.
French President Francois Hollande says an end to the eurozone crisis is “very close” and wants a deal agreed on the first stage of a banking union.
But Germany argues that the proposed deadline is unrealistic.
The proposal for a single banking regulator was agreed at the EU’s June summit.
But Berlin says there will be no final decision in Brussels because of concerns about plans for the regulator to supervise an estimated 6,000 banks across the eurozone.
Germany wants to continue regulating its financial institutions and is unhappy with a plan eventually to hand the European Central Bank full supervisory control.
Instead, German Finance Minister Wolfgang Schaeuble has proposed a more powerful role for the EU Economic and Monetary Commissioner in regulating national budgets. Chancellor Angela Merkel is understood to back his idea.
The commissioner should have the ability to veto a budget if it breaks deficit rules, the finance minister argues.
In setting out plans for full fiscal union, Wolfgang Schaeuble has set out a fairly ambitious negotiating position.
The finance minister’s plan would require a convention to be set up next year in order to change EU treaties, but many eurozone countries believe other priorities should be addressed first, our correspondent says.
“We are all taking part in this solidarity, not only the Germans,” Francois Hollande said in a newspaper interview.
European Commission President Jose Manuel Barroso warned on Wednesday that a lack of convergence towards a closer union was “nourishing populist debates ultimately to put an end to this project”.
“It is clear that the euro area needs to evolve to a fiscal union… and ultimately a political union,” Jose Manuel Barroso told the centre-right European People’s Party congress in Bucharest.
The Brussels summit will take place against a backdrop of calmer European stock markets than in previous meetings and less concern over the debt crises in Spain and Greece.
Although Greeks are set to hold a general strike on Thursday, the Athens government and its international creditors are said to have reached a deal on the austerity measures needed before the next bailout installment is handed over.
“I am confident we are doing everything we have to do in order to get it soon so that we can move towards recovery,” Greek PM Antonis Samaras said.
Although there is growing speculation that Spain will soon ask for eurozone help in tackling its debt crisis, Madrid has seen its borrowing costs fall and may not ask for any aid at all.
Spanish region of Catalonia has asked for a bailout of 5 billion euros ($6.3 billion) from the central government.
This summer, an 18 billion-euro public fund was set up by Madrid to aid its 17 autonomous regions, which are in deep debt.
Catalonia represents one-fifth of the Spanish economy.
It comes as official figures showed that Spain’s economy contracted further in the second quarter.
The economy shrunk by 0.4% between April and June after a 0.3% drop in the previous three months, the Instituto Nacional de Estadistica said.
Spanish region of Catalonia has asked for a bailout of 5 billion euros from the central government
The nation’s struggling economy has now declined for three straight quarters. On an annual basis, Spain’s economy contracted by 1.3% in the second quarter.
Speculation has persisted that the country will have to request a full financial rescue.
In June, Spain requested 100 billion euros ($122 billion) of loans from the eurozone’s bailout fund to help support its banks, which are struggling with bad debts from loans made in the property sector.
Despite this, the official figures show that Spain grew during 2011 as a whole despite earlier statements that it had shrunk for the year. But the economy contracted in 2010 more than had been stated.
The European Central Bank has said it will come up with ways to help eurozone countries, leading to raised hopes that it will buy Spanish debt to push down the cost of borrowing.
Prime Minister Mariano Rajoy has said he will do “what was best for the Spanish people” and is considering all options regarding a bailout, which has helped calm markets.
On Tuesday, the interest that Spain pays to borrow for three months fell to 0.946%, from 2.434% at a similar auction in July. Six-month debt dropped to 2.026%, from 3.691%, at the sale.
But the rate of interest Spain pays on longer-term borrowing has remained high because of investor concerns, making it difficult for the nation to service its debts.
Last month, Madrid announced additional spending cuts and tax rises worth 65 billion euros.
Meanwhile, the so-called troika – the International Monetary Fund, the ECB and the European Commission – are in Lisbon to monitor the progress that Portugal is making on its commitments under its bailout.
Last week, official figures indicated that the government would probably miss its target of deficit target unless it found ways to tighten the budget further.
This comes after the troika visited Greece last week.
Greece’s continued access to the bailout packages depends on a favorable report from the troika.
Athens is trying to finalize a package of 11.5 billion euros of spending cuts over the next two years to qualify for the next 33.5 billion-euro installment of its second 130 billion-euro bailout.
European markets have fallen after the European Central Bank (ECB) president Mario Draghi said the bank would come up with ways to help struggling eurozone countries “over the coming weeks”.
Analysts had been hoping for more details and immediate action.
Help from the ECB would also only be given if the governments themselves made certain commitments, he said.
The Spanish and Italian stock markets fell sharply while both countries’ borrowing costs rose sharply.
Earlier, the ECB kept the main eurozone interest rate at a record low of 0.75%.
There had been hopes that Mario Draghi could announce immediate measures to bring down the cost of borrowing for some of the eurozone’s struggling members.
“What we have expressed is guidance, and strong guidance, about strong measures which will be completed in the coming weeks,” Mario Draghi said.
High borrowing costs have been at the centre of the eurozone crisis, with countries needing bailouts when the yields on their 10-year bonds have been consistently above 7%.
Bond yields are taken as indicators of what interest rate governments would have to pay to borrow money.
European markets have fallen after the ECB president Mario Draghi said the bank would come up with ways to help struggling eurozone countries "over the coming weeks"
Mario Draghi said that the high yields on some eurozone government bonds were unacceptable, adding that, “the euro is irreversible”.
He said the ECB may intervene in the bond markets to support struggling nations.
But having fallen in recent days due to the anticipation of ECB support, Spain’s 10-year bonds rose above 7% after Mario Draghi spoke, having been at 6.6% before he started.
“Once again, we have no commitment to action from the ECB, and no execution of promises previously made,” said Carl Weinberg, chief economist at High Frequency Economics.
“Traders and investors who expected immediate action are, and should be, disappointed. More scolding of governments, but no ECB action, is the bottom line.”
The yield on Italian 10-year bonds rose from 5.7% before Mario Draghi spoke to 6.2% afterwards.
But yields on short-term bonds fell, reflecting Mario Draghi’s plans to buy them instead of longer term debt.
Some analysts were more positive about Mario Draghi’s comments.
“This is a revolutionary policy, as far as the ECB is concerned. It means the ECB plans to go into the markets and buy bonds, of two to three-year durations, in very substantial quantities,” said Nick Parsons at National Australia Bank.
“These are potentially unlimited and should be big enough to have the desired effect. Mr. Draghi is certainly on the right track.”
At his press conference, Mario Draghi said that the ECB’s bond-buying process would resume, but that it would be different to the Securities Markets Programme (SMP), which involved buying large quantities of government bonds from banks and other financial institutions on the open market.
Mario Draghi said that the new scheme would involve buying shorter-term bonds, which should allay some of the fears of the German government, worried about having to guarantee debts of weaker countries for years.
Governments, however, would also first have to apply for help from one of the eurozone’s rescue funds, the European Financial Stability Facility or the European Stability Mechanism, he said.
They would also have to demonstrate they were making necessary changes.
“Policymakers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination,” he said.
Currently, the European bailout fund – the EFSF – and its delayed sister fund – the ESM – would require any country seeking help to sign a memorandum of understanding, or promise to carry out certain measures such as cutting spending or raising taxes.
When asked whether Spain, and Italy would, therefore, have to submit to similar strictures imposed on Portugal, Ireland and Greece before the ECB could act to buy their bonds, Mario Draghi replied: “Yes, that is exactly how you should see it.”
There were also signs of continued division on the ECB governing council.
Asked whether the ECB’s decisions had been unanimous, he replied: “The endorsement to do whatever it takes to preserve the euro as a stable currency has been unanimous.”
“But it is clear, and it is known, that Mr. Weidmann [ECB member and head of the German bank] and the Bundesbank have their reservations… about buying bonds.”
The ECB, which sets the cost of borrowing for the 17 countries which use the euro, cut its key rate from 1% to 0.75% last month, to try to bring down borrowing costs and stimulate economic activity.
EU leaders at Brussels summit have agreed to use the eurozone’s bailout fund to support struggling banks directly, without adding to government debt.
Speaking after 13 hours of talks in Brussels’, EU chief Herman van Rompuy also said a eurozone-wide supervisory body for banks would be created.
Officials said the plans could be finalized during July.
Analysts say Germany appears to have given ground after pressure from Spain and Italy to provide more support.
The two southern European countries had withheld support from an earlier plan to for a growth package worth 120 billion Euros ($149 billion).
They wanted measures to lower their borrowing costs.
Herman van Rompuy said the new proposals would break the “vicious circle” between banks and national governments.
Although Germany appears to have compromised, Chancellor Angela Merkel has managed to ensure that Brussels has more control over the finances of eurozone countries, something she had wanted.
The deal came about after new French President Francois Hollande appeared to throw his weight behind Italy and Spain.
“I’m here to try to find rapid solutions for those countries facing pressure from the market, despite having made huge efforts to balance their budgets,” the socialist French president said.
EU leaders at Brussels summit have agreed to use the eurozone's bailout fund to support struggling banks directly, without adding to government debt
The new growth package, announced by Herman van Rompuy, is made up of:
• A 10 billion-euro boost of capital for the European Investment Bank, expected to raise overall lending capacity by 60 billion Euros
• Targeting 60 billion Euros of unused structural funds to help small enterprises and create youth employment
• A pilot launch of EU project bonds worth 4.5 billion Euros for infrastructure improvements, focusing on energy, transport and broadband.
In Brussels, both Italy and Spain were pushing the eurozone bloc to agree steps to reduce the interest rates the two countries have to pay.
Spanish 10-year government bonds were trading at yields above 6.9% on Thursday, coming close to the 7% considered unaffordable.
Spain’s Prime Minister Mariano Rajoy said debt sustainability was a pressing problem.
“We are paying rates that are too high to finance ourselves and there are many Spanish public institutions that cannot finance themselves.”
Spanish and Italian leaders are worried that their countries could soon – in effect – be shut out of international markets and forced to seek assistance.
Angela Merkel has warned there is no “magic formula” to solve the crisis.
Several EU leaders want individual countries’ debts guaranteed by the whole eurozone, for instance in the form of centrally issued eurobonds.
But Angela Merkel told the German parliament on Wednesday that eurobonds were “the wrong way” and “counter-productive”, adding: “We are working to breach the vicious circle of piling up debt and breaking [EU] rules.”
She said to loud applause: “Joint liability can only happen when sufficient controls are in place.”
Stronger competitiveness was the condition for sustained growth, the chancellor said.
Meanwhile, UK Prime Minister David Cameron said on his arrival at the summit that eurozone countries had some “hard decisions” to make.
When asked about plans for transferring more budgetary powers to the EU level, he said he shared “people’s concerns about Brussels getting too much power”.
European authorities have also unveiled proposals such as the creation of a European treasury, which would have powers over national budgets. The 10-year plan is designed to strengthen the eurozone and prevent future crises, but critics say it will not address current debt problems
EU leaders at Brussels summit are examining how to ease the eurozone debt crisis amid competing visions about how to revive the worst-hit economies.
As the Brussels summit opened, French President Francois Hollande made a new plea for EU solidarity and Spain warned that its borrowing costs were too high.
German Chancellor Angela Merkel scorned talk of pooling eurozone debt, saying it would require more budget rigor.
But there appears to be broad agreement on new measures to stimulate growth.
On arrival at the summit, UK Prime Minister David Cameron said “these are hard decisions for the eurozone countries to make and we should be encouraging them to go ahead”.
But when asked about plans for transferring more budgetary powers to the EU level David Cameron said: “I… in many ways share people’s concerns about Brussels getting too much power.”
European authorities have unveiled proposals such as the creation of a European treasury, which would have powers over national budgets.
The 10-year plan is designed to strengthen the eurozone and prevent future crises, but critics say it will not address current debt problems.
EU leaders at Brussels summit are examining how to ease the eurozone debt crisis amid competing visions about how to revive the worst-hit economies
Spanish 10-year government bonds were trading at yields above 6.9% on Thursday morning, coming close to the 7% considered unaffordable.
Spain’s Prime Minister Mariano Rajoy said debt sustainability was a pressing problem.
“We are paying rates that are too high to finance ourselves and there are many Spanish public institutions that cannot finance themselves.”
Spanish and Italian leaders are worried that their countries could soon – in effect – be shut out of international markets and forced to seek assistance.
The debate about short-term fixes could become very bitter indeed.
Angela Merkel has warned there is no “magic formula” to solve the crisis.
Several EU leaders want individual countries’ debts guaranteed by the whole eurozone, for instance in the form of centrally issued eurobonds.
But Angela Merkel told the German parliament on Wednesday that eurobonds were “the wrong way” and “counter-productive”, adding: “We are working to breach the vicious circle of piling up debt and breaking [EU] rules.”
She said to loud applause: “Joint liability can only happen when sufficient controls are in place.”
Stronger competitiveness was the condition for sustained growth, the chancellor said.
Francois Hollande believes eurobonds should be a eurozone priority for helping countries like Italy and Spain bring their borrowing costs down.
But Angela Merkel continues to insist that before anything is done to increase the burden on German taxpayers, building blocks towards greater fiscal, banking and, eventually, political union must be put in place.
There is certainly a chance that the summit will take a small step on a path that would partly deal with the fundamental weaknesses in the eurozone.
But in the absence of major short-term action, he explains, borrowing costs for countries such as Spain and Italy are likely to remain painfully high, making the eurozone’s financial situation strained for a long time to come.
Angela Merkel said progress had been made on a pact for growth and she hoped European leaders would adopt a 130 billion-euro ($162 billion) stimulus package.
Francois Hollande, who was elected French president on an anti-austerity ticket, said on Thursday there were “points in common on growth”.
“Merkel has moved in the direction I wanted,” he told French TV channel France 2.
Adding that he and the German leader had also agreed on the financial transaction tax, he said they still needed to find agreement “on stability”.
“There are ongoing discussions, it’s normal,” he said.
“We need to act in support of the countries which need it: Spain and Italy.”
Spain’s borrowing costs have risen to another euro-era record, with lenders demanding a higher interest rate.
The yield on benchmark 10-year bonds hit 7% on Thursday morning, a level which many analysts believe is unsustainable in the long term.
It came as Moody’s cut Spain’s credit rating to one notch above “junk” and ahead of an Italian bond auction.
At the weekend, Spain agreed a 100 billion-euro ($126 billion) bailout of its banks by fellow eurozone countries.
It was hoped that the bailout would help calm fears in the financial markets about the strength of Spain’s banks and ease Madrid’s borrowing costs.
Spain's borrowing costs have risen to another euro-era record, with lenders demanding a higher interest rate
However, Moody’s said the eurozone plan to help Spain’s banks would increase the country’s debt burden.
Moody’s cut Spain’s rating from A3 to Baa3 and said it could reduce this further within the next three months.
If Spain is cut to junk, some index-tracking investors would be forced to sell the country’s bonds. This would add to upward pressure on yields and push Spain’s financing costs higher, heightening the risk that the country will need a full-blown bailout.
The difference in the rate between Spanish and safe-haven German 10-year bonds widened to a high of 5.44 percentage points.
“The risk of losing investment grade pressured the differential this morning and left it at historic highs,” analysts at Spanish brokerage Renta 4 said in a market report.
Italy will test market sentiment on Thursday with the sale of up to 4.5 billion Euros of bonds.
On Wednesday, Moody’s also cut its credit rating for Cyprus by two notches, from Ba1 to Ba3. Cypriot banks are heavily exposed to the troubled Greek banking system.
However, it is unclear whether the Cypriot government will seek a loan from its European partners or will instead turn to Russia, who already provided it with a 2.5 billion-euro loan in December.
There is more and more speculation that Greece is about to leave the euro.
Greece has been unable to form a government, and new elections seem set to give power to parties that reject the spending cuts that have been agreed with other eurozone governments and the International Monetary Fund.
But without those spending cuts, the Greek government will receive no more bailout loans, it won’t have the money to pay its debts, the Greek banks will probably go bust, and the European Central Bank may be forced to cut Greece loose from the single currency.
What would this mean for Greece and the rest of Europe?
1. Greek meltdown
Greece’s banks would be facing collapse. People’s savings would be frozen. Many businesses would go bankrupt. The cost of imports – which in Greece includes a lot of its food and medicine – could double, triple or even quadruple as the new drachma currency plummets in value. With their banks bust, Greeks would find it impossible to borrow, making it impossible for a while to finance the import of some goods at all. One of Greece’s biggest industries, tourism, could be disrupted by political and social turmoil.
In the longer run, Greece’s economy should benefit from having a much more competitive exchange rate. But its underlying problems, including the government’s chronic overspending, may not go away.
2. Bank runs
Ordinary Greeks may queue up to empty their bank accounts before they get frozen and converted into drachmas that lose half or more of their value. Depositors in other eurozone countries seen as being at risk of leaving the euro – Spain, Italy – may also move their money to the safety of a German bank account, sparking a banking crisis in southern Europe.
Confidence in other banks that have lent heavily to southern Europe- such as the French banks – may also collapse. The banking crisis could spread worldwide, just like in 2008. The European Central Bank may have to provide trillions of Euros in rescue loans to the banks. Some governments may not have enough money to prop up their banks with the extra capital needed to absorb losses and restore confidence; the banks could then go bankrupt.
Greece has been unable to form a government, and new elections seem set to give power to parties that reject the spending cuts that have been agreed with other eurozone governments and the International Monetary Fund
3. Business bankruptcies
Greek businesses face a legal and financial disaster. Some contracts governed by Greek law are converted into drachmas, while other foreign law contracts remain in Euros. Many contracts could end up in litigation over whether they should be converted or not.
Greek companies who still owe big debts in Euros to foreign lenders, but whose main sources of income are converted to devalued drachmas, will be unable to repay their debts. Many businesses will be left insolvent – their debts worth more than the value of everything they own – and will be facing bankruptcy. Foreign lenders and business partners of Greek companies will be looking at big losses.
4. Sovereign debt crisis
Sovereign debt is the money a government borrows from its own citizens or from investors around the world. But if Greece leaves the eurozone, setting a precedent that such a thing can happen, then investors will become very nervous about lending to other struggling eurozone countries.
This could leave the governments of Spain and Italy short of money and in need of a bailout. These two huge countries together account for 28% of the eurozone’s total economy, but the EU’s bailout fund currently doesn’t have enough money to prop both of them up. Even France’s government could get into trouble if it needed to bail out its enormous banking sector.
5. Market turmoil
Nervous investors and lenders around the world may start selling off risky investments and move their money into safe havens. Stock markets may plunge. High-risk borrowers could face sharply higher borrowing costs, if they can borrow at all.
Meanwhile, safe investments such as the dollar, the yen, the Swiss franc, gold and perhaps even the pound would rise, while safe governments such as those of the US, Japan, Germany and even the UK could borrow more cheaply. And it’s not all bad news – the oil price may well fall sharply.
6. Political backlash
As eurozone governments and the European Central Bank face enormous losses on the loans they gave to Greece, public opinion in Germany may turn against providing the even larger bailouts probably now needed by big countries like Italy and Spain. The ECB’s role of quietly providing rescue loans to these countries in recent months would be exposed and could become politically explosive, making it harder for the ECB to continue to prop up their economies.
However, the threat of a meltdown might push Europe’s or the eurozone’s governments to agree a comprehensive solution – either dissolution of the single currency, or more integration, perhaps through a democratically-elected European presidency tasked with overseeing a massive round of bank rescues, government guarantees and growth-stimulating infrastructure investment.
7. Recession
Crisis-stricken eurozone banks may be forced to slash their lending. Businesses, afraid for the euro’s future, may cut investment. Faced with a barrage of bad news in the press, ordinary people may cut back their own spending. All of this could push the eurozone into a deep recession.
The euro would lose value in the currency markets, providing some relief for the eurozone by making its exports more competitive in international trade. But the flipside is that the rest of the world will become less competitive – especially the US, UK and Japan – undermining their own weak economies. Even China, whose economy is already slowing sharply, could be pushed into a recession.
8. Greek debt default
Unable to borrow from anyone (not even other European governments), the Greek government simply runs out of Euros. It has to pay social benefits and civil servants’ wages in IOUs (if it pays them at all) until the new drachma currency can be introduced. The government stops all repayments on its debts, which include 240 billion Euros of bailout loans it has already received from the IMF and EU. The Greek banks – who are big lenders to the government – would go bust.
Meanwhile, the Greek central bank may be unable to repay the 100 billion Euros or more it has borrowed from the European Central Bank to help prop up the Greek banks. Indeed, by the time Greece leaves the euro, the central bank may have borrowed even more from the ECB in a last ditch effort to stop the Greek banks collapsing.
World markets are down as Greece’s continuing political uncertainty undermines confidence.
Greece failed to form a coalition government through talks on Sunday and will continue discussions with political leaders on Monday evening.
Bank shares are worst hit, particularly in Spain and France, with Madrid’s IBEX index down 3% and the CAC down 2.7%.
The Dow Jones has opened 1% lower while London’s 100 share index is down 2%.
Germany’s DAX is down 2.5%.
The undermining factor is again the future of the eurozone.
Eurozone finance ministers are meeting in Brussels to discuss the situation in Greece and Spain.
World markets are down as Greece's continuing political uncertainty undermines confidence
Irish Finance Minister Michael Noonan expressed his support for Greece’s place within the eurozone: “We are not planning a Greek exit, that’s not our business.
“My view is that Greece should continue to stay in the euro, and any support I can give them at the meetings over the next two days to achieve that objective I will do so.”
But he warned that any new Greek government must stick to the austerity plan already agreed.
French banks were among the biggest fallers as investors worried about their exposure to other troubled eurozone countries.
Losses worsened throughout the session leaving BNP Paribas, Societe Generale and Credit Agricole down almost 5%.
Spain’s Banco Santander was also down almost 5% while part-nationalized Bankia lost more than 9%.
They said they would set aside an extra 2.7 billion Euros and 2.1 billion Euros respectively to meet new government requirements aimed at cleaning up the country’s ailing property market.
The price of oil also fell on fears about weakening economic activity.
Brent crude fell $1.69 to $110.57 a barrel. In March, it was $128 a barrel.
US crude fell $1.86 to $94.27.
Meanwhile, both Spain and Italy carried out successful bond auctions on Monday.
Appetite for Spanish and Italian debt was more than strong enough, but the return demanded by investors in Spain’s debt was higher than in previous auctions, reflecting a dip in confidence.
Spain sold 2.9 billion Euros in short-term debt, paying 2.985%, up from 2.623% last time.
The difference in the rate demanded by Spanish 10-year bond investors over the equivalent German bunds hit 4.83%, its highest level since the creation of the euro.
The yield, or interest rate, on Spain’s key 10-year bonds, which are traded on the market, jumped 23 basis points to a record high of 6.22%.
Italy raised 5.25 billion Euros, paying a yield of 3.91%, almost unchanged on the previous rate of 3.89%.
Greece’s lack of a government puts in doubt its ability to stick to austerity measures imposed as part of its financial bailout. Without holding to agreed cuts it will not get the rest of the support funds it needs to function.
Adding to the lack of clarity is the fact that anti-bailout parties did well in the elections.
Anti-austerity feeling may be growing in Germany too after Chancellor Angela Merkel’s party suffered a defeat on Sunday in an election in North Rhine-Westphalia, the country’s most populous state.
On top of that, new French President Francois Hollande won his place after promising to focus more on growth rather than austerity, raising concerns as to whether he will be able to work as closely with Angela Merkel as his predecessor Nicolas Sarkozy did.
The two were the driving force behind the eurozone’s fiscal compact.
Twenty five out of 27 EU leaders have signed a new treaty to enforce budget discipline within the bloc.
The “fiscal compact” aims to prevent the 17 eurozone countries again running up huge debts.
It must now be ratified by individual parliaments and, in the case of the Irish Republic, a referendum.
UK Prime Minister David Cameron, who with the Czechs refused to sign, said his proposals for cutting red tape and promoting business had been ignored.
But the newly re-appointed President of the European Council, Herman Van Rompuy, said British calls to boost the EU economy were being taken seriously and he had sought to re-draft the summit’s conclusions accordingly.
The fiscal compact is what emerged after David Cameron vetoed plans to change the EU treaties to enforce greater budgetary discipline back in December.
German Chancellor Angela Merkel described it as a “great leap”, a first step towards stability and political union.
These new powers may face an early test as both Spain and the Netherlands have admitted they will miss targets for reducing their deficits.
While there has been a change of emphasis at this summit, “from crisis mode to growth mode” in the words of one senior official, it will be difficult to achieve whilst tough spending cuts are being made.
In a speech at the signing ceremony, Herman van Rompuy said: “This stronger self-constraint by each and every one of you as regards debts and deficits is important in itself.
“It helps prevent a repetition of the sovereign debt crisis. It will thus also reinforce trust among member states, which is politically important as well.
“The restoration of confidence in the future of the eurozone will lead to economic growth and jobs. This is our ultimate objective.”
