Europe Holds Crisis Management Hostage to Volatile Greek Voters

Greek Prime Minister Panagiotis Pikrammenos
Greek Prime Minister Panagiotis Pikrammenos attends a news conference following the European Leaders summit at the European Council headquarters in Brussels. Photographer: Jock Fistick/Bloomberg

European leaders tied their next steps on the financial crisis to the outcome of a bitterly contested election in Greece that may determine whether the 17-nation euro currency splinters.

A six-hour summit ended early today with an exhortation to Greek voters to elect a pro-austerity government on June 17 that makes the budget cuts needed to keep the financially ravaged country in the euro.

Euro-area finance ministers and leaders don’t meet again until after the Greek election, potentially facing a question deemed unthinkable when the euro was set up: how to broker an exit without shattering the broader European financial system.

“The summit as a whole was very troubling,” Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore, said on Bloomberg Television. “While they talked, they did absolutely nothing. Probably the best analogy for that informal dinner that they had is fiddling while Rome burns, or indeed Athens burns.”

Leaders made an appeal to Greek voters that echoed one issued by finance ministers last week, promising further disbursements of 240 billion euros ($302 billion) in aid to a government that stays on the budget-cutting path.

“We want Greece to remain in the euro area while respecting its commitments,” according to a statement after the summit, the 18th since Greece’s debt problems erupted. “We expect that after the elections, the new Greek government will make that choice.”

Greek Poll

European officials counted on the implied threat of an unprecedented euro-region expulsion to sap support for an anti-bailout party, called Syriza, that surged to second place in May 6 balloting. The ensuing political melee led to the new elections, with most polls pointing to Syriza as the top vote getter.

The euro fell for the 21st time in 24 days, touching a 22-month low, as the currency union’s fate got entwined with the Greek campaign. The euro bought $1.2565 at 2:30 p.m. in Brussels, down 0.1 percent from yesterday.

“If Greece elects a pro-reform government, the country could probably stay in the euro, preventing a new negative precedent in the euro area that could spark contagion to other countries such as Spain and Italy,” Christian Schulz, an economist at Berenberg Bank in London, said in an e-mailed note.

The runup to French legislative elections in June cemented the political holding pattern in Europe, with the outcome there decisive for new French President Francois Hollande’s approach to the more than two-year-old crisis.

Symbolic Break

Attending the Brussels summit on his ninth day in office, the Socialist Hollande made a symbolic break with the French-German tandem that dominated European policy making under his predecessor, Nicolas Sarkozy.

Hollande called for joint bond sales by euro governments in the face of opposition from Chancellor Angela Merkel of Germany, a AAA country that paid 0.07 percent to borrow for two years in an auction yesterday. She reported “huge differences” with France over that proposal to reshape the way Europe operates.

“It makes no sense that everything is pasted together with euro bonds or some other kind of instrument that seems to show solidarity, only to end up with more difficult conditions in Europe than we have today,” Merkel said in Berlin today.

“Not unheated” was Luxembourg Prime Minister Jean-Claude Juncker’s description of the euro bond debate.

With the leaders unwilling to meddle in Greece and going past midnight without discussing relief for recession-wracked Spain, the summit amounted to a brainstorming session over policy options for the post-crisis economy.

‘Building Blocks’

European Union President Herman Van Rompuy took on the job of exploring “building blocks and a working method” for forging a more integrated economy, possibly with more shared borrowing and centralized banking supervision.

Creditor countries such as Finland and the Netherlands joined Germany in rejecting euro bonds, while only two leaders mentioned the possibility of a European bank deposit insurance scheme. Proposals for a centralized “bank resolution” fund have made little headway since the Lehman Brothers Holdings Inc. crisis of 2008, as each European country guarded its banks and refused to subsidize failing institutions elsewhere.

Van Rompuy’s assignment was similar to one he was given in October, only to be sidetracked by negotiations over a German-inspired deficit-limitation treaty now undergoing ratification. The treaty’s biggest hurdle comes on May 31 with a referendum in Ireland, a country that has twice rejected European accords.

Van Rompuy’s report on the institutional rethink is due at the next summit, on June 28-29. One potential outcome is to set up a committee to look at euro-zone governance in greater depth, much like a panel headed by then European Commission President Jacques Delors sketched out the path to the euro in 1989.

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