'The Common Currency Endgame Has Begun'

Spiegel
November 4, 2011

Greece has backed away from holding a referendum on the euro bailout package. This week's tumult, however, shows that Europe is still far away from solving the euro crisis. German editorialists on Friday warn that the worst-case scenario may arrive sooner rather than later.

It took less than a week for confidence in the euro zone to evaporate. Again. Last Wednesday, European Union leaders agreed to sweeping measures aimed at saving the common currency. But the shocking announcement on Monday by Greek Prime Minister Georgios Papandreou that his country intended to hold a referendum on the conditions of the bailout measures, with its rigid and unpopular austerity measures, was all it took to shake markets again and raise doubts about the strength of the bailout.

As if that weren't bad enough, interest rates are rising on Italian government bonds again -- this week increasing to 6.4 percent and ever closer to the psychologically important 7 percent figure at which analysts believe the country will begin to have significant difficulties refinancing its debt.

On Thursday, even as Papandreou abandoned his referendum plans, he reinforced the image of a bumbling euro zone unable to get a grip on its currency crisis. His about face came within 24 hours of an emergency meeting with euro-zone leaders in Cannes -- and under tremendous pressure from German Chancellor Angela Merkel and French President Nicolas Sarkozy.

For the first time, the pair broke a longstanding taboo by raising the prospect that Greece might be forced to exit the euro. "We are prepared," Merkel said. And high-ranking representatives of the euro states said they were already reviewing scenarios of a Greek insolvency. On Thursday, Merkel reiterated her message, saying "our main concern is the stability of the euro."

Papandreou backed down after Merkel and Sarkozy threatened to freeze an €8 billion aid tranche until the referendum had been concluded. The Greek prime minister faces a crucial vote of confidence on Friday evening.

As the uncertainty over Greece's future worsened this week, the debt crisis in Italy also intensified. On Thursday, Merkel made clear to the Italian prime minister that he needed to accelerate his planned austerity measures. Later that night, a draft of the G-20 closing statement emerged including language with Italy agreeing to come close to balancing its budget by 2013. G-20 leaders also pressured Berlusconi to agree to have Italy's progress in implementing savings measures and reforms monitored by both the International Monetary Fund (IMF) and the EU.

In addition, a number of Italian media reports are suggesting Berlusconi's government in Rome could be close to collapse.

German editorialists on Friday look to the latest developments and conclude that the European debt and euro crisis has escalated to a dangerous new level. Some argue that the only hose left that is big enough to fight the fire is the European Central Bank with its money printing machines.

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