Greek euro exit looms as G8 gathers
World leaders will huddle at Camp David Friday with the focus on Greece as it stumbles toward a possible eurozone exit that would hold wildly uncertain repercussions for the global economy.
Leaders from the Group of Eight industrialised nations will gather at the history-imbued US presidential retreat near Washington for a two-day summit, with the dramatic denouement of Greece’s economic crisis firmly at the top of the agenda.
The recent clobbering of Greek parties that back austerity measures under the country’s 173 billion euro ($220 billion) bailout has sparked a fresh round of market panic and left the two-year-old effort to prevent a Greek default on life support.
Governments in many G8 countries believe the odds of a chaos-inducing Greek default and exit from the euro have risen spectacularly since the polls.
Already, markets across the globe have been rocked by speculation that the crisis is slipping beyond control.
Europe’s main stock markets sank in opening deals Friday as investor sentiment was hit by the latest ratings downgrade for Greece.
Fresh Greek polls are scheduled for June 17, but there is no certainty that supporters of the painful reforms will win, and already nervous Greeks have been pulling money from bank accounts.
“The crisis in Greece is a very serious and immediate problem,” said Uri Dadush, a former senior World Bank official. “Bank deposits are leaving Greece today.”
While G8 governments are trying to frame the choice for Greek voters as starkly as possible, donors could yet face a tough choice: Acquiesce to Greek demands for some slack — risking the ire of taxpayers — or cut off funding to Athens, a move likely to trigger default and Greece’s exit from the euro.
But elections in France and Germany have shattered a longstanding consensus that spending cuts are the answer to Greece’s — and Europe’s — woes, leaving the G8 divided as the end game approaches.
Freshly elected French President Francois Hollande is sure to use his maiden G8 to press for pro-growth policies, and is likely to win the backing of most people around the table.
That puts German Chancellor Angela Merkel firmly in the hot seat.
Wary of German taxpayer anger about repeated bailouts for countries on Europe’s periphery, Merkel has insisted on a toolkit of austerity first, second and third.
But the resulting slow-down in growth has made it even more difficult for governments to get tax revenues and boost their coffers.
“The medicine that they have been taking is not working,” Dadush said.
“This will be an opportunity for the US, Italy and France, not to gang up, but to work together on Merkel to say ‘look, you need a somewhat different approach.’”
Merkel may even find herself arguing with her host, President Barack Obama.
Fearing the impact of European financial chaos on the United States as it approaches elections in November, Obama seems poised to wade into what has largely been a European debate.
At the summit, Obama will raise “specific” actions Europe could take, as the United States welcomes the “debate in Europe about the imperative for jobs and growth,” according to National Security Adviser Tom Donilon.
Still, with Obama unwilling or unable to put more cash on the table, he may find himself with minimal leverage.
A compromise may be found in the creation of joint European bonds for specific infrastructure or investment projects in hard-up countries.
Supporters say the move would provide much needed stimulus at a relatively low cost and keep budget cuts in place, allowing the G8 to claim it is focusing on austerity and growth.
Others argue that this would do little to reverse the drag that fiscal consolidation has put on the economies of Greece, Spain, Portugal, Ireland and Italy.
G8 leaders will hold their main discussions on Europe’s fiscal plight Saturday at Camp David’s rustic collection of cabins on the wooded Catoctin Mountain in Maryland, outside Washington.
On Friday night, discussions around the dinner table at Obama’s Laurel Lodge will focus on Iran’s nuclear challenge ahead of talks between global powers and the Islamic Republic in Baghdad later this month.
The leaders are also expected to address Syria’s crackdown on its anti-government uprising, fears that North Korea will launch a new nuclear test and Myanmar, after Obama eased US investment restrictions Thursday on the country formerly known as Burma.
The G8 club of developed nations includes the United States, Britain, Canada, Italy, France, Germany, Japan and Russia.