Analysis: “This would be a crushing blow for the single currency project”

THERE have been cliffhanger days in Europe. But none more dramatic and with so much at stake than the Greek drama that unfolded yesterday. Prime minister George Papandreou was forced to back away from a referendum as he came under fire from within his own party – and a critical confidence vote lies in store for him today.

By the weekend, Greece could be headed for a stormy election, a government of national unity – or more days of uncertainty under a gravely weakened premier who has lost all credibility. And hanging over all these options is the thunderbolt of debt default.

Moreover, the crisis is far from confined to Greece. The fears that deepened this week is of default contagion spreading to Italy, whose bond yields rose further towards unsustainable levels. It is an Italian default that really scares markets. It is not just Papandreou who may soon be swept from office, but Berlusconi, too.

Any hope that the G20 summit would somehow emerge with a plan to cauterise this unholy mess faded as delegates anxiously followed events in Athens on their BlackBerrys. If the Greek government does not change course, and the complex rescue deal agreed only last week is at the heart of an explosive election campaign, confidence in other debt-stricken Euro economies would evaporate.

To add to the sense of deepening crisis, there were reports in Athens last night that metro stations had been closed on the orders of the police, who said they wished to prevent “incidents”.

The future not just of Greece, but the single currency is now on a knife edge. Doubts surround whether Greece will get its next aid payment of €8 billion without a firm commitment to implement the austerity package. It desperately needs this money to repay bonds by 11 December. But if the confidence vote does not go in Papandreou’s favour, he cannot secure agreement on a government of national unity and an election is called, the country could be forced into default.

German chancellor Angela Merkel declared in Cannes that the top priority was to save the Euro, rather than rescuing Greece. But policymakers are now said to be openly working on possible scenarios for a Greek exit.

This would be a crushing blow for the single currency project. As Nicolas Sarkozy put it dramatically at a press conference yesterday, “If the euro explodes, Europe will explode.”

Hence the growing talk at Cannes of a “super IMF” that would stand behind the eurozone bail-out fund – the European Financial Stabilisation Facility. Prime Minister David Cameron used the G20 summit to press for an increase in the resources available to the IMF to support ailing economies. He and Chancellor George Osborne left little doubt that Britain was prepared to consider a hike in its commitment. But assurances that these extra funds would go to help any country in distress, not just eurozone members, would be swept aside in Westminster as disingenuous at best.

A larger UK contribution to the IMF would spark an enormous political row in Britain where a return to recession is looking ever more likely. There have been growing calls for the coalition to ease up on the deficit reduction plan and release funds to support economic recovery. To see money being given to help bail-out debt-laden members of a single currency experiment Britain chose wisely not to join would be deeply unpopular.

Thus does the Greek crisis have a direct bearing on the our fortunes – or lack of them. For the moment stock markets took heart at the demise of the Greek referendum proposal. But a turbulent election, with police in the streets – and the army not far behind – may be the next scary scenario to confront an already deeply apprehensive world.