As Europe braces for another week of high-level crisis meetings, more political turmoil, market upheaval and widening social unrest, all eyes will be focused on a new government in Greece and mounting pressure for change in Italy.
But as political battles take the spotlight in Europe, governments are taking the painful steps to push austerity drives needed to bolster their battered finances.
France is set to announce budget cuts Monday totalling as much as €8-billion in response to the widening euro crisis, gloomier economic forecasts and a strong desire to hold on to its endangered triple-A credit rating. Ireland faces deeper trims and higher taxes than previously planned to meet conditions of its emergency aid from the European Union and the International Monetary Fund.
The budget-balancing measures come as euro-zone finance ministers gather for yet another meeting focused on Greece’s financial implosion, and ways to strengthen Europe’s rescue fund – the European Financial Stability Facility – so it has enough financial firepower to safeguard Italy and Spain and keep open their access to capital markets.
Late Sunday, Greek Prime Minister George Papandreou agreed to give step down and help form an interim government as Greece seeks to secure its bailout by the European Union.
Even as political turmoil intensifies in Europe, the drive for austerity is taking hold. Elected officials are coming to grips with the fact they can no longer tie their popularity to debt-fuelled spending on programs their governments cannot afford. The new austerity means more wrenching pain across the region. Economists warn that further belt-tightening will only worsen Europe’s economic troubles, but governments have little choice, analysts say.
“The 2012 budget will be one of the most rigorous budgets that France has seen since 1945,” Prime Minister François Fillon declared in a speech to regional officials in the Alps, noting that the “hour of truth has arrived.”
The Irish government, faced with a sharp reduction in forecast growth next year to 1.6 per cent from 2.5, will shed an additional €200-million from the budget, bringing the total reduction for the fiscal year to €3.8-billion.
The painful cuts are part of the deficit-slashing regime Ireland accepted in exchange for the bailout from the European Commission, the IMF and the European Central Bank. Ireland has four years to slash its deficit to 3 per cent of its GDP. Different governments have approved four successive austerity budgets for the country, which is being held up by European finance ministers, so far with little effect, as an example for Greece and Italy.
“The European institutions and serious players have a lot of respect for Ireland, and it is appropriate that we work with them,” Irish Finance Minister Michael Noonan said.
But Greece and Italy remain worries. Greece is nearly out of cash and needs to show its commitment to the bailout plan to receive funding. Embattled Italian Prime Minister Silvio Berlusconi could lose his faltering grip on power if he fails to win a crucial parliamentary vote on public finances.
Mr. Berlusconi faced harsh criticism from his euro-zone counterparts over his government’s failure to impose serious reforms to deal with its fiscal woes. He was forced to accept humiliating quarterly visits from the IMF to check progress on reforms. And the bond market has driven yields on Italian government bonds to their highest level since Italy adopted the euro, signalling growing fear about the country’s ability to finance itself.
Italy’s worsening situation “poses the more immediate threat to the European Union,” global intelligence firm Stratfor said in a note to analysts. If Mr. Berlusconi loses a Nov. 15 confidence vote, his government would fall. That “could sufficiently scare the markets to the point that Italy would face a cutoff from capital markets within days.”
All told, this will be a week “for damage control in Europe,” Stratfor said, “but at the moment it appears there will not be an imminent crisis.”