THE EUROPEAN authorities are battling to regain the initiative from doubtful markets as anxiety about the €110 billion rescue plan for Greece pushed the euro to its lowest level for a year.
Amid fears that efforts by the European Union and International Monetary Fund to stem the Greek financial crisis may not be enough to avert a wider sovereign debt crisis in the euro zone, European governments went on the offensive yesterday to shore up the loan scheme for Greece.
Spanish prime minister José Luís Zapatero dismissed “intolerable” rumours about his country’s solvency and said market speculation on the euro was unfounded and irresponsible.
Berlin and Paris marshalled support for the Greek rescue plan from German and French banks, and the European Commission warned it may investigate credit rating agencies.
But as Greek civil servants walked off the job yesterday ahead of a general strike today, stock markets lost ground and the borrowing costs of heavily indebted countries such as Ireland rose. Against the US currency, the euro traded below $1.30 for the first time since April 2009.
Nobel laureate Joseph Stiglitz, former World Bank chief economist and adviser in the mid-1990s to US president Bill Clinton, said the Greek crisis could herald the “end of the euro” if institutional problems were not addressed. “The hope that this will calm speculative pressures I think is probably misguided,” he said of the rescue plan.
Although the rescue “may work for a little while, in the long run the fundamental institutional problems are there, speculators are aware of these problems, and as the weaknesses in Europe get more severe there may be a field day for speculative attacks.”
Mr Zapatero, whose country holds the EU’s six-month rotating presidency, summoned reporters to a press conference in Brussels, during which he rejected as “complete madness” a market rumour that he would soon ask for a €280 billion aid package from the euro zone.
The rumour, quickly dismissed by the IMF, follows an unexpected downgrading of Spain’s debt by Standard Poor’s last week.
After Ireland and Greece, Spain’s budget deficit is the third highest in the euro zone. But the country’s debt burden – 53.2 per cent of gross domestic product – is considerably lower than most European countries.
“I was told something about that rumour and the truth is I give it no credit; it is complete madness,” Mr Zapatero said.
“These rumours can increase differences and hurt the interests of our country, which is simply intolerable and of course we intend to fight it.
“We cannot be watching what happens each day in the markets. I just stick to the facts.”
Mr Zapatero, who said new figures would confirm the turnaround in the Spanish economy, was speaking after meeting European Commission chief José Manuel Barroso and European Council president Herman Van Rompuy.
At a summit on Friday, euro zone leaders will take stock of their response to the debt debacle and give definitive support to the Greek rescue.
Concern persists, however, that the €30 billion austerity package tied to EU/IMF loans will undermine the recovery of Greece’s economy.
“If you cut budgets too excessively the economy gets weaker, tax revenues go down and the improvement in the fiscal position of the country is much less than one would have hoped,” Mr Stiglitz said.
French finance minister Christine Lagarde meets bank leaders today to discuss how French institutions could participate in the Greek rescue.
These talks follow pledges from German banks and insurers to keep credit lines open and to avoid selling Greek bonds. Austrian banks have made similar commitments.
EU internal markets commissioner Michel Barnier said the European authorities “need to go further to look at the impact of the ratings on the financial system or economic system as a whole”.
