Europe’s debt crisis dominated and distracted a summit of world leaders as Greece’s government veered towards collapse and Italy came under renewed pressure to prove its credit-worthiness.
As Group of 20 chiefs began talks in the French resort of Cannes, their focus was on Athens where Prime Minister George Papandreou was clinging to power after abandoning a referendum that triggered a suspension of European aid. Amid concern Italy may be the next domino to fall as its bond yields jumped to an euro-era record, Prime Minister Silvio Berlusconi was pushed by Germany and France to accelerate an austerity drive.
Europe’s failure to fix two years of turmoil drew rebukes from foreign leaders concerned global economic growth is under threat. The European Central Bank offered relief with an unexpected interest-rate cut although its new president, Mario Draghi, said a euro-area recession is looming.
“Our partners should be acting significantly more actively and decisively,” Russian President Dmitry Medvedev said in Cannes. “If this doesn’t happen, we will be hostage to this situation for a long time to come.”
Even with the decision by Greek Prime Minister George Papandreou to scrap a December ballot on the terms of last week’s bailout package, German Chancellor Angela Merkel and French President Nicolas Sarkozy kept aid for Europe’s most-indebted nation on ice until it delivers deeper budget cuts.
“What counts for us is actions,” Merkel said. “So far, I don’t really see those actions.”
Whether Greece will need to leave the currency bloc was discussed by the G-20, according to Canadian Prime Minister Stephen Harper, who added he expected “cooler heads will prevail.”
On a day of political sparring in Athens, Papandreou squared off with rebels in his own party -- including Finance Minister Evangelos Venizelos -- over the referendum that European officials yesterday insisted would determine whether Greece stays in the euro. Greek lawmakers hold a confidence vote tomorrow on whether to support his administration.
Heightening the confusion, Greek opposition chief Antonis Samaras said Papandreou misunderstand a proposal for a transitional government. Samaras, leader of the New Democracy party, called on the incumbent to quit as his party’s lawmakers walked out of the parliamentary chamber.
Europe and the International Monetary Fund made cross-party support for budget cuts a condition for paying the next 8 billion euros ($11 billion) of Greek aid, the sixth installment in the 110 billion-euro package awarded at the outbreak of the crisis in May 2010.
No Way Out
Breaking with the doctrine that there is no way out of the euro, Merkel and Sarkozy cornered the Greek leader last night in Cannes and transformed the since-cancelled referendum into an up-or-down decision on Greece’s euro membership.
“The euro zone must absolutely send a message of credibility to the whole world,” Sarkozy told reporters today. “When we take decisions they must be applied, when we set rules they must be respected.”
Europe’s chiefs pledged to speed up a plan to more than double the heft of their 440 billion-euro rescue fund to stop Greece’s travails from spreading to other cash-strapped economies such as Italy.
Italy was in the spotlight amid an increase in its 10-year bond yield to 6.3 percent, more than triple Germany’s. The euro area’s third-biggest economy has its second-largest debt burden after Greece and has grown more slowly than the region average in each of the last 10 years.
Berlusconi was told by Merkel and Sarkozy to press ahead with budget-balancing measures, a day after his Cabinet agreed to include emergency measures in a bill set for passage by Nov. 15. Investors want Berlusconi to go further than the steps proposed so far, which include raising the retirement age and selling more state assets.
As politicians clashed, Europe’s economy and markets received a surprise boost from the ECB as Draghi marked his first week as its president by overseeing a rate cut. The bank’s Governing Council voted unanimously to reduce their benchmark by 25 basis points to 1.25 percent in a shift forecast by four of 55 economists surveyed by Bloomberg News.
“What we’re observing now is slow growth heading toward a mild recession,” Draghi said.
The former Bank of Italy governor signaled central bankers have no intention of bailing out profligate nations. While it’s not illegitimate to question Greece’s place in the euro area, the bloc’s founding treaty doesn’t allow for a country leaving and it would be hard to imagine it happening, he said.
Europe’s mess overshadowed the G-20 talks which conclude tomorrow. U.K. officials said throughout the meetings, government heads monitored their Blackberry devices to keep up to speed with fast-changing events in Greece.
“The most important aspect of our task over the next two days is to resolve the financial crisis here in Europe,” U.S. President Barack Obama said. Europe needs to “flesh out more of the details” of its bailout blueprint, he said.
The leaders discussed a bigger role for the IMF with the U.K. joining Brazil and Russia in supporting an increase in the lender’s $391 billion war chest. In a draft of a statement to be released tomorrow, they also urged the IMF to “expedite” a new liquidity line for countries “with strong policies and fundamentals facing exogenous, including system, shocks.”
“When the world is in crisis, it’s right that you consider boosting the IMF,” U.K. Prime Minister David Cameron told reporters.