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Winnipeg Free Press - PRINT EDITION

Germans in sour mood heading to G8 summit

By: Alan Clendenning

Posted: 05/19/2012 1:00 AM | Comments: 0

Spain's recently nationalized Bankia SA is laden with toxic assets. (DANIEL OCHOA DE OLZA / THE ASSOCIATED PRESS)

MADRID, Spain -- Chaos in Greek politics and Spanish banking combined this week to underscore just how fragile Europe's economy remains after an eviscerating austerity regime that has spawned unemployment, desperation and misery. And there is no respite in sight, as Germany's finance minister predicted Friday the crisis could last up to another two years.

Wolfgang Shaeuble, who holds the region's purse strings, chastised the leaders of the world's biggest economies as they headed to Washington for a weekend summit, saying efforts to fix the crisis over the past few years "weren't good enough." The leaders, he told French Radio Europe 1, "must show that Europe can achieve common positions more quickly."

But common positions have been in short supply. After more than a week trying to form a government, Greek politicians gave up this week and called another vote for June, with no real reason to think it will get them any further from the chaos that reigns.

Spain was forced to deny that a troubled bank faced a run on its deposits, then saw a major ratings agency downgrade 16 of its lenders and four of its semi-autonomous regions, similar to U.S. states. On Friday, Spain's central bank announced the level of bad loans on the books of Spanish banks -- hit by broke construction companies, recession and the worst unemployment rate in the 17-nation eurozone -- is at an 18-year high, fuelling concerns about the financial sector in the eurozone's fourth-largest economy.

European countries are straining under high borrowing rates. The rates have risen as investors are nervous about governments' debt loads relative to the strength of the economies. Under pressure from Germany, Europe's strongest economy, governments have laid off workers, cut pay for others, reduced spending on social programs and imposed higher taxes and fees to boost revenue.

Yet as economies have shrunk, countries' debt levels have worsened. In Spain, where one of every four citizens is jobless and one of every two under 25, the interest rate on 10-year government bonds stood at a worrying high of 6.2 per cent Friday, not far from the seven per cent mark considered unsustainable in the longer term, and forced Greece, Ireland and Portugal to ask for bailouts.

This week's developments suggested that for some countries, the medicine -- cutting budgets as part of excruciating austerity programs -- may be worse than the disease.

The nightmare scenario involves Greece being unable or unwilling to implement the cuts it needs to keep using the euro. Investors, fearful that Portugal, Ireland, Spain and Italy will follow Greece's path, would then pull their money out of those countries as well. That would likely be disastrous for the global economy, although it is so unprecedented that nobody really knows.

-- The Associated Press

Republished from the Winnipeg Free Press print edition May 19, 2012 B6

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