As predicted, the relief and relative calm produced by the Oct. 27 agreement between European Union leaders battling the tightening euro zone debt crisis didn’t last long. Markets just aren’t ready to do with the fruits of optimism when there’s still so much to be made from low-hanging pessimism. Less expected, however, were both the legitimacy and the source of resurgent investor fears about the situation: the main beneficiary of the EU deal, Greece, placing it in peril. Tuesday morning markets plunged—and European leaders gnawed their knuckles in disbelief—following the startling announcement by Greek Prime Minister George Papandreou that he’s putting acceptance of the massive bail-out deal to a referendum of the nation’s emphatically angry and austerity-defiant voters.
The result within markets and government corridors alike was as if everyone on the planet pulled out a slide whistle and blew a piercing decrescendo. Given that, it’s probably a good thing G20 leaders are set to meet and mull the problem over in France this week–and perhaps find an effective collective response that Europe hasn’t come up with thus far. Imagine, decisive action at the G20 — a conclave long on talk and short on results — as the last hope to avoid disaster. That’s how seemingly dire things now look.
Papandreou’s move provides ample reason to fear the EU agreement—which included $180 billion in new funds to Athens, and a 50% write-down of its debt—will be defeated when presented to voters in late January or early February. Polls taken since last Thursday’s announcement of the European accord showed 60% of Greek public opinion opposing it. And a new round of mass protests against continued debt-fighting austerity measures coinciding with Greece’s national holiday this weekend featured infuriated demonstrators sending government officials fleeing state ceremonies amid cries they’d betrayed the country.
Given that atmosphere, even the best-case scenario holds little reason for optimism. Should Papandreou and his ruling center-leftists manage to convince a majority of Greek voters to accept terms of the new bail-out (and continuing austerity measures that are bound to accompany it) in the three months before the referendum, the full-quarter wait that involves will force markets, banks, and other EU capitals to chew over their apprehension and doubt about the outcome. And we all know markets just hate apprehension and doubt — not to mention waiting. Meaning, of course, even if the measure does pass after that time, the wider euro zone crisis still won’t be resolved—and will have probably worsened in the interim.
Even before Papandreou’s Monday evening revelation left his EU peers muttering spicy recriminations, it was clear last week’s enormous package of measures still hadn’t addressed all the pressing elements driving the crisis. The Oct. 27 accord’s impact on Greece—lowering the amount Athens owes by about $140 billion—would only reduce Greek debt to 120% of GDP by 2020, a level that would probably still prove impossible to finance given the miserable growth outlook across Europe. Indeed, even more than Rome’s 118% debt-to-GDP level, it’s mostly Italy’s lousy growth prospects that have brought Italian bonds, too, under significant attack by investors–sending the price Rome pays for borrowing ever higher. That offensive on Europe’s fourth-largest economy may well only be preparing the way for the final market offensive on what some consider the euro zone’s Maginot: France, Europe’s second-largest economy with an 86% debt-to-GDP level, a chronic budget deficit, and falling 2012 growth forecasts of 1% or lower. And despite its ongoing austerity efforts, France risks seeing its AAA rating cut by agencies in the coming weeks, which would threaten to make its rising borrowing costs to fund debt too costly to shoulder.
As usual, there are enough “ifs” involved to allow the possibility of some sort of resolution of the crisis (or at least a degree of calm returned to it) to co-exist alongside scenarios of increased market attacks, serial defaults, and partial or full implosion of the euro. But nearly a year of unconvincing EU reaction to the situation suggests it’s wisest to view the post-Oct. 27 glass as still half empty. That certainly seems prudent given the serious uncertainty the accord now faces in a Greek referendum—and the anger, resentment, and division that will be created within the euro zone and its leadership over Athens’ unilateral move. (The tabloid headlines across Europe alone Tuesday should be the stuff of fading Old World insult and caricature.)
It’s for that reason the G20 summit in Cannes Thursday and Friday now takes on even larger importance than before. Though the European debt crisis was to figure foremost in discussions there, it’s clear the euro zone turmoil will now become the only real issue leaders focus on. U.S. President Barack Obama has said he’ll huddle separately with French President Nicolas Sarkozy and German Chancellor Angela Merkel before official talks even open. It’s also certain EU officials who’d already solicited funding from China to help finance their bail-out plan will use even more frontal, forward seduction methods to woo cash from Beijing.
But given the scale and urgency the crisis has assumed, it may well be the only way of surmounting it will be for G20 heads to do something EU leaders have failed to up till now: agree upon a collective, massive, too-big-to-fail financial defense package to prop Europe up, save the euro—and avert the economic melt-down on the continent that would drag the entire global economy into recession. Globalization has its serious downsides; this is one of them. It’s time to put out the fire in Europe’s house, or risk seeing the flames spread around the neighborhood.