Global stocks are slumping yet again on fears Greece will default on its debts and trigger a crisis in the euro, or worse still, that Greece will be forced to leave the eurozone, even though there is no legal basis for such an exit under European Union law.
The effect of Greece being chucked out ..... will turn the whole European Union and the world at large into an Armageddon- Edward Scicluna
What really caused concern in the markets and European capitals was an article in the German newspaper Die Welt by German Economy Minister Philipp Rösler, the leader the Free Democratic Party – Chancellor Angela Merkel’s junior coalition partner – that the orderly bankruptcy of Greece should no longer be considered “taboo”.
Media reports have also disclosed that officials in Germany are working on a plan to protect the country’s banks in case of a Greek default.
Labour MEP Edward Scicluna, who is an economist, told The Times Business: “When the German voters, or the French or the Dutch call for the ousting of Greece they do this because they are not well informed of how intricately interconnected the EU, but especially the eurozone has become, both economically and financially.
“The European leaders know this and that is why it is still considered unthinkable, even though lately in order to increase the pressure on Greece some politicians in Germany and the Netherlands have resorted to threats which include such ousting from the eurozone.
Prof. Scicluna said it took one bank, Lehman Brothers, to bring down the financial institutions and economies around the world to their knees, a crisis which we now know we cannot get out of so easily.
“In view of the enormous exposure of banks to Greek debt (BNP Paribas €8.5 billion, Societe General €6.6 billion, Credit Agricole €27 billion, Deutche Bank €3.6 billion, Commerz Bank €4.6 billion) the effect of Greece being chucked out, followed by the default of many Greek banks, will be followed by the default of some French and German banks will turn the whole European Union and the world at large into an Armageddon.
“That is why both the US and China hope and pray like all of us that a solution will be found. The EU political leaders on their behalf have to get out of their denial stage and act quickly,” he said.
Business analyst John Cassar White said financial markets are factoring in a 98 per cent chance of Greece defaulting on its debt in the foreseeable future. He says the solutions for the Greek debt problem adopted by EU political leaders do not convince the markets since they fail to acknowledge that the Greek debt is unsustainable.
“Should Greece be forced out of the euro, it is inevitable that there will be a run on Greek banks as people will try to send their savings abroad. If Greece adopts the drachma again, this will be a weak currency that will affect the quality of life of the Greeks who have to import most of the goods they consume.
“What is more worrying is that if Greece defaults on its debt and is forced to leave the euro, there will be a run on major European banks, especially in Germany and France, that hold large amounts of Greek debt. These banks will have to be supported by governments in order to avoid a meltdown of the financial system that would seriously affect the real economy of most EU countries,” he said.
Mr Cassar White said another possibility is that northern European countries like Germany, Holland and Finland would opt to leave the eurozone themselves and adopt a new and stronger currency. This would affect the competitiveness of these countries especially in their business with China and will signify the end of the euro as a viable currency.
“If Greece leaves the euro, Malta will be affected like all other countries in the eurozone. We have a small open economy that depends on the economic mood of the markets where we sell our goods and services.
“A disintegration of the eurozone could throw Europe into a depression from which we will not be immune,” he said.
The Greek economy has struggled since the country joined the single currency 10 years ago and has had to introduce harsh austerity measures in return for a €110 billion international bailout agreed to in 2010 and a second €109 billion rescue plan agreed to in July.
Greece now has debts totalling more than €340 billion and is among the least creditworthy of nations. The unemployment rate is 10 per cent and he Greek economy is expected to contract by up to five per cent this year.
On Tuesday Angela Merkel warned members of her government to stop speculating about the possibility of a Greek default. In a radio interview, she warned that the future of the euro and of Europe was at stake.
“That is why everyone should weigh their words very carefully,” she said, in a clear rebuke to her Economy Minister and Horst Seehofer, leader of the CSU (the CDU’s sister party in Bavaria) and Bavarian Prime Minister, who called for the possible expulsion of Greece from the eurozone.
“What we do not need is alarm in the financial markets,” she said. “There is already quite enough uncertainty.”
Her words followed an equally firm intervention from Wolfgang Schäuble, German Fnance Minister, who said that “it makes no sense to increase the nervousness with idle gossip.”
Yesterday European Commission President Jose Manwel Barroso, speaking to the European Parliament on this latest eurozone crisis, said: “This is a fight for the economic and political future of Europe. This is a fight for integration itself.”
Mr Barroso said that the political process in the eurozone was too slow for impatient markets.