Leader: Cool heads and strong hearts needed to avert disaster

IN WHAT was by any standards was one of the most chaotic and confusing days in modern European politics, the government of Greece is on the brink of collapse, that of Italy hangs by a thread – and the future of a massive eurozone rescue deal hangs precariously in the balance. Would Papandreou survive? Is the referendum dead?

International attention swivelled from a cacophonous G20 summit in Cannes, where EU leaders indicated that Greece would not get vitally-need EU bail-out cash until it agrees the deal, to Frankfurt, where the European Central Bank (at last) cut interest rates, to Athens – and minute-by-minute denials and contradictions on the government’s position. Both Papandreou and his proposal for a referendum came under fire from his own party. Amid rumours of his imminent resignation, he called for support ahead of a confidence vote today. He looks unlikely to get it – or his referendum, about which he now seems equivocal. The country’s finance minister, speaking to Socialist Party MPs immediately after the prime minister, declared Greece must say it was not holding a referendum.

The eurozone – and the world’s financial markets – cannot take much more of this. For months the fate of Europe’s banks and the savings of hundreds of millions of people worldwide have had to endure a fearful and destabilising roller-coaster ride. Markets were no clearer last night as to how the euro crisis might be resolved – if indeed it can be.

The fretting has turned this week to cold fear. Yesterday the yield on Italian government bonds stretched further into unsustainable levels while politicians grappled with the unthinkable – a disorderly Greek default, a chaotic exit from the eurozone – and a far greater conflagration about to engulf Italy as governments are unable to staunch a flight of capital and the consequent Italian collapse.

For such a catastrophe to be avoided, there must first be credible government in charge. This means a government of national unity in Greece – and almost certainly a similar arrangement in Italy on the departure of Silvio Berlusconi. Greece may default – but a default by Italy would plunge the global banking system into a crisis far worse than Lehman. These governments must give credible assurances to the world that they will undertake – and stick to – a debt and deficit reduction plan. They must also, by their unity, show voters there is no alternative if the bail-out to save them from collapse is to be put into action.

A second requirement – as this has now become a threat to the global economy – is the creation of a mega-IMF, putting its muscle behind the rescue deal. Ambitious though these requirements are, they are dwarfed by the appalling consequences if the euro rescue deal fails. Europe now faces a threat as great as the 1930s. If yesterday was dramatic, events today will need to be even more so to pull Europe back from this precipice.