G8 summit: As the leaders meet in US, crisis deepens in eurozone flashpoints

EUROPEAN officials are working on contingency plans in case Greece leaves the eurozone, the EU’s trade commissioner said yesterday, while Berlin said it was prepared for all eventualities.

German finance minister Wolfgang Schaeuble, one of Greece’s harsher critics, said market turmoil fuelled by the eurozone debt crisis could last another year or two.

“Regarding the crisis of confidence in the euro ... in 12 to 24 months we will see a calming of the financial markets,” he said.

European shares hit their lowest level since December, depressed by the prospect of a Greek euro exit spreading a wave of contagion in the currency bloc, which could engulf larger economies such as Spain.

Policymakers insist they want Greece to remain in the eurozone, but EU trade commissioner Karel De Gucht said the European Commission and the European Central Bank were working on scenarios in case it has to leave.

“A year and a half ago, there maybe was a risk of a domino effect,” Mr De Gucht said. “But today there are, in the European Central Bank as well as in the Commission, services working on emergency scenarios if Greece shouldn’t make it.”

Speculation about such planning has been rife, but the comments appeared to be the first time an EU official has acknowledged the existence of contingencies.

SPAIN

Spanish banks’ bad loans rose in March to their highest level in 18 years, figures from the Bank of Spain showed yesterday, underscoring the problems facing the government.

The Bank of Spain said bad loans rose to 8.37 per cent of the banks’ outstanding loans, up from 8.3 per cent in February.

Banks beset by bad property loans which could deteriorate further, along with overspending in indebted regions, are the two biggest risks for Spain’s public finances. Investors believe Spain needs to aggressively address these two issues to avoid a bail-out.

IRELAND

Irish voters are set to approve the EU’s new fiscal treaty by a margin of almost two to one, despite widespread dissatisfaction with the government, which supports the pact, opinion polls showed yesterday.

Ireland will hold what is likely to be the only popular vote on the “fiscal compact” on 31 May and the government has led the “Yes” campaign, warning that a rejection would undermine the country’s position in the eurozone.

Although opponents have tried to tap growing anger at the government’s austerity drive, 50 per cent of voters plan to vote in favour, with 31 per cent against, a Red C/Paddy Power poll showed.

“There is a feeling that people are saying they would like to vote ‘No’, but they just couldn’t hack the danger of that,” Red C managing director Richard Colwell said.

Irish voters have twice rejected European treaties in recent years, before reversing course in repeat votes.

Opponents have also seized on comments by France’s finance minister, Pierre Moscovici, that Paris will not ratify the European pact on fiscal discipline unless it is amended to include commitments to promote economic growth.