Merkel gets tough on Greece - again.

Economists warn that 2012 may bring a recession in the eurozone, but Nicolas Sarkozy and Angela Merkel insist that there is a 'good chance' of reaching a budget agreement by the end of the month.

by Elizabeth Anderson
Last Updated: 06 Nov 2012

Yesterday's meeting between Europe’s top stooges was the first of several designed to put in place tougher rules to prevent countries from running up huge debts and a high amount of public debt.  

Greece was first on the agenda at the conference in Berlin. The French and German leaders called on Greece to impose the conditions needed for the cash-strapped country’s second bailout. Second on Merkozy's list was how to ensure a sustainable future for the eurozone: namely, how to boost employment and get the economies of eurozone nations growing once more.

The eurozone crisis overshadowed much of 2011 and a similar trend is expected this year. Greece is teetering on the edge of default, and there is speculation that the country will get booted out of the euro. But German Chancellor Angela Merkel is keen to keep the eurozone a cohesive whole: 'Our intention is that no country should have to leave the eurozone,' she said. To that end, she urged Greece to agree to the debt restructuring terms which were outlined in October. Once Greece agrees, it can receive the second bailout – the €130bn (£107bn) aid package needed to prevent the country from going bankrupt and exiting the single currency.

Greece is dragging its heels over the conditions because it’s struggling to impose the austerity measures needed to get the money. Unsurprisingly, the country’s unions and business leaders aren’t accepting the cuts easily. Greece is also still negotiating with creditors over a 50% write-off in the value of Greek bonds. It may even be wondering whether life outside the euro would be much worse than life inside it.

But a decision needs to come quickly, as the international debt inspectors are paying the country a visit in the middle of January to check Greece is putting its austerity programme into action. Greece faces a €14bn debt repayment in March and it needs the rescue package to finance that. If it doesn’t, Greece could become the first country in the eurozone to default.

And that’s likely to set off panic on the markets, leaving investors rushing to offload their bonds in other debt-laden countries like Italy and Spain. In fact, investors are so keen to invest in a safe haven, Germany paid a negative return on bond yields yesterday meaning that banks are effectively paying for the privilege of buying German debt.

But are Merkel and Sarkozy laying into Greece because it’s easier than sorting their own problems out? There are fears the whole of the eurozone is going into recession, following falling retail sales and a drop in German factory orders. And there's an air of desperation about mooted plans to accelerate the introduction of the €500bn European Stability rescue fund. Discussions on introducing an EU financial transaction tax are still proving divisive, with Sarkozy staunchly pro and Merkel, with an ear to German business leaders, proving more reluctant to take the plunge.

At this rate, 2012 in the eurozone could be even more eventful than the last.       

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