Seeking a eurozone scapegoat

Mario Monti has pointed the finger at France and Germany for setting a bad example on debt that helped foster the eurozone crisis, but it's the Greek national elections that could drive real instability in the region.

France and Germany deserve some of the blame for fostering the eurozone’s debt crisis, according to Italian Prime Minister Mario Monti.

During a visit to Tokyo, Monti recounted an episode during the early years of the eurozone that he believes contributed to the bloated government debts that triggered a major crisis last year.

"This story begins in 2003, when the euro was still just a baby. At that stage, Germany and France were the ones who were lax about government deficits and debts," he said.

Monti pointed out that the European Union, which at that point was chaired by Italy, decided not to penalise the two countries even though they were flouting rules aimed at capping budget deficits at 3 per cent of GDP.

"Of course, if the father and mother of the eurozone break the rules, you can’t expect that…(countries such as) Greece will respect them," he noted.

The comments come just days before eurozone finance ministers are due to meet in Copenhagen to give their blessing to plans to boost the firepower of the region’s emergency rescue fund, and as fears are growing that Athens may fail to stick to the terms of its latest bailout.

According to a report in The Wall Street Journal, Greece’s national elections, due to be held in late April or early May, are now shaping up as a public revolt against Greece’s political establishment, which is being blamed for the painful austerity policies that have been forced on the country in exchange for its two bailouts.

The election will be the first chance the Greeks have had to decide their political leadership since the debt crisis began in late 2009. Since last November, Greece’s government has been led by an unelected technocratic prime minister, Lucas Papademos, with the support of the two main political parties – the conservative New Democracy party and the Socialist, or Pasok Party.

Papademos was able to secure Greece’s second €138 billion ($US183.7 billion) bailout from the European Union and the IMF. But both New Democracy leader, Antonis Samaras, and Socialist leader, Evangelos Venizelos, had to provide written promises that they would adhere to punishing austerity policies after the elections. This included a promise to pass legislation by June that would cut government spending by a further 5.5 per cent of GDP, dealing an extra blow to the crippled Greek economy.

Greece’s two main political parties have seen their support slump, as voters blame them for the austerity policies and for mismanaging the Greek economy. Following the elections, New Democracy is expected to be the largest party, but polls suggest that it now has the backing of only 25 per cent of voters. Support for Pasok, which won a landslide victory in 2009, has slumped to 15 per cent, or lower.

Many analysts are tipping that after the elections, New Democracy could form a coalition government with Pasok. Even so, the combined support for the two parties is only around 35-40 per cent, compared to the 75 per cent of the total vote the two parties picked up in Greece’s 2009 election.

Meanwhile, according to the WSJ, recent opinion polls suggest half the Greek electorate is now planning to vote for radical opposition groups, ranging from old-style Soviet communists to anti-immigrant neo-Nazis.

This could doom Greece to growing political instability, and make it harder for the country to enact the stringent spending cuts and economic reforms that the EU and the International Monetary Fund are demanding.

Meanwhile, the Greek debt dynamics remain precarious. As the WSJ notes, even after the latest Greek bailout and debt restructuring, Greece’s total public debt still stands at around €330 billion, or more than 160 per cent of GDP, a level most economists believe is unsustainable. Meanwhile, the ever-shrinking Greek economy means that the country’s budget deficit is stuck at around 10 per cent of GDP.

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