Eurozone crisis: A love-hate relationship imperils the currency

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The Irish voted ‘with a heavy heart’ this week to tough out the hardships of remaining a member of the Eurozone. Greek and French voters protested the pain of austerity last month by throwing out leaders who had been slashing jobs and services to reduce debt. Spain and Italy may be more committed to the belt-tightening required to shore up the euro, but skeptical investors could undermine those sacrifices by waging a run on their banks.

Europeans have been lurching from one crisis to another for the last four years as recession wreaked havoc with many of the 17 Eurozone economies that have too little in common beyond the coins and banknotes they use. Some of the world’s most influential economists now worry that crisis could escalate to catastrophe if Greeks heed the siren song of a fiery leftist telling them they can keep their euros but renege on austerity measures they promised in exchange for bailout funds.

A German-led effort to get the bloc’s financial houses in order has exposed flaws in the common currency’s management and ambivalence among euro users about the continent’s ambitious goals for economic integration. What is accepted by frugal, savings-minded Northern Europeans as laudable restraint in public spending has sown resentment in Eurozone countries ravaged by high unemployment, teetering banks and withering cuts in social services.

Ireland’s vote to approve the fiscal treaty signed this year by 25 of the European Union’s 27 member states was a convincing 60.3% in favor. But politicians on both sides of the issue acknowledged that it was a hard pill to swallow for a country struggling to meet its obligations after being bailed out by Eurozone colleagues in 2010.

Ireland had one of the highest deficits in the Eurozone three years ago, but it has cut spending and debt enough to see prospects for emerging from a four-year recession. Small signs of economic improvement -- a marginal drop in unemployment last month and a hint of growth over the last year -- were enough to push the Irish to commit to the Eurozone’s collective debt-reduction goals by endorsing the treaty.

‘The astonishing thing about this campaign was that lots of people voted ‘yes’ with a heavy heart, and many voted ‘no’ with a heavy heart,’ said Joan Burton, Ireland’s social protection minister, citing concerns in both camps about the treaty’s potential constraints on spending to create jobs.

The long-term good may not be so prominent in the minds of Greek voters when they go to the polls June 17 to choose among candidates making brash and contradictory promises about Greece’s future in the Eurozone. Alexis Tsipras has moved his radical left Syriza party to the political fore, according to the latest poll, with his vow to bail on the bailout terms and his dubious assertion that Greece would nevertheless retain use of the euro.

“The first act of a government of the left, as soon as the new Parliament is sworn in, will be a cancellation of the bailout and its implementation laws,” Tsipras told boisterous supporters Friday when he outlined the party’s economic platform.

All recent polls in Greece have shown Syriza and the conservative New Democracy Party running a close battle for popular support, but neither likely to get enough votes to form a government on its own. That threatens a repeat of the fractured May 6 vote and futile attempts among the irreconcilable parties to form a coalition government. The latest survey -- and the last before a two-week moratorium on polling ahead of the election -- on Friday showed Syriza almost doubling its share of the vote captured last month, with 31.5% support compared with 25.5% for New Democracy, which finished first on May 6.

In a sign of the disarray afflicting Greece, the country didn’t manage to update its unemployment statistics for the last three months for an EU report released Friday showing a euro era-high 11% joblessness across the currency union. In February, the last month for which Athens has released figures, 21.7% of Greeks were out of work.

More job cuts and tax hikes were due to be imposed this month ahead of the next payment of bailout money from Brussels. Those cuts have been essentially suspended in the absence of an elected government.

As Eurozone residents hold their breath awaiting the next Greek vote, more immediate worry has settled on Spain, where national leaders are urging fellow Europeans to help rescue Spanish banks saddled with defaulted loans issued during a building boom in the years before recession hit in 2008. Spain last week promised troubled lender Bankia nearly $24 billion to keep it afloat, but borrowing rates have soared to record highs -- nearing the 7% rate that pushed Ireland, Portugal and Greece over the edge and forced them to seek bailouts.

Spain, the fourth-largest economy in the Eurozone, may be too big to bail out, economists say, spreading fears for the future of the entire common-currency project.

The EU commissioner for monetary and economic matters, Olli Rehn, warned during a speech in Helsinki, Finland, on Friday that ‘the way things are going and under the current structures, the euro area has a significant risk of breaking up.’

Eurozone states have ‘extremely tough decisions ahead, and it’s important to face the truth,” Rehn said, alluding to suggestions among other financial leaders that contingency plans should be drawn up to cope with the worst-case scenarios being threatened from several euro states.

Earlier this week, the European Commission called for creating a ‘banking union’ that would allow the bloc’s financial institutions to invest directly in troubled national banks, rather than force already indebted states to take on further obligations at unsustainable interest rates. But Germany has resisted the idea of pooling its sterling credit with other euro users, and Chancellor Angela Merkel also remains steadfast against loosening the spending shackles on struggling states to allow them to invest in growth.

The standoff amid possibly impending catastrophe has alarmed financial experts around the globe.

‘The Eurozone is experiencing three crises at the same time -- a fiscal crisis, a banking crisis and a growth crisis,’ said former U.S. Treasury Secretary Robert E. Rubin, now at the Council on Foreign Relations, citing weak political leadership in Europe and deep concern for the situation in Spain. ‘If the Eurozone continues to unravel, not only will that have very serious consequences for the Eurozone, but I believe it will have serious and maybe even severe consequences for the entire global economy, including the United States.’

In a commentary Friday in Britain’s Financial Times, World Bank President Robert Zoellick drew disturbing parallels between what is happening now in Europe and the financial crises that were the bellwethers of the 2008 collapse on Wall Street.

‘Events in Greece could trigger financial fright in Spain, Italy, and across the Eurozone,’ Zoellick wrote, saying that the summer ahead had ‘an eerie echo of 2008.’

Eurozone leaders need to be ready to recapitalize banks if spooked investors rush to withdraw their euro-denominated assets, he said.

‘There will not be time for meetings of finance ministers to discuss the outlook and debate the politics of incrementalism,’ Zoellick said. ‘In panicked markets, investors flee to safe assets, sparking other flames.’

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--Carol J. Williams in Los Angeles