European leaders may be hoping their gamble on a massive bailout for Greece will be enough to shore up a wobbly euro, but the markets have reacted with less than enthusiasm.
With Greece having passed a slew of harsh austerity measures, its 15 partners in the common currency area, the euro zone, are to formally agree to the €110 billion bailout at a summit in Brussels on Friday evening. A vote in the German parliament earlier in the day will pave the way for approval of the joint EU-International Monetary Fund rescue package designed to prevent Greece from going bankrupt.
Ahead of Friday's summit, German Chancellor Angela Merkel and French President Nicolas Sarkozy wrote an open letter stressing their commitment to preserving "the solidity, stability and unity of the euro zone." The two argue that lessons have to be drawn from the crisis and they called for a "reinforcing fiscal surveillance within the euro area, including providing more effective sanctions" against those who violate the euro zone's strict deficit limits.
German Finance Minister Wolfgang Schäuble told the lower house of parliament, the Bundestag, that there was no alternative to approving a rescue package. "It would be disastrous to risk a member of the European currency union, Greece, now becoming insolvent," he said on Friday ahead of the vote.
Sigmar Gabriel, leader of the center-left Social Democrats (SPD), lashed out at Merkel's handling of the crisis. He told parliament that she had "destroyed the trust in the credibility of Germany's European policy." His party opted to abstain from voting on the bill.
Yet, there was never much doubt that it would be passed in the Bundestag, where Merkel's center-right ruling coalition has a comfortable majority. Her Christian Demcocrats and coalition partners from the pro-business Free Democrats were joined by the Greens in supporting the aid package. The far-left Left Party was the only party to oppose it. The final result was 390 deputies in favor, 72 against and 139 abstentions.
Merkel's government also has a majority in the Bundesrat, Germany's upper legislative chamber, which approved the bill later on Friday. The bill will pass into law when it is signed by President Horst Köhler, a former IMF director.
The Greek bailout has proved highly unpopular in Germany, which as the euro-zone's biggest country is bearing the brunt of the bailout costs. It will grant as much as €22.4 billion ($28.6 billion) to Athens over the next three years. On Thursday the Greek parliament approved the harsh austerity measures that are a condition of the bailout. Pensions and public sector wages are to be slashed and consumer taxes are to go up in a bid to cut the spiralling budget deficit.
Fears of a Ripple Effect
European leaders hope the rescue package will now stem the threat to the euro zone as a whole. However, there is much skepticism about whether the current aid package will be enough for Athens. Other euro-zone governments with weak finances, such as Portugal, are also facing debt downgrades and increased borrowing costs.
The European Central Bank President Jean-Claude Trichet has tried to play down fears of contagion. "Portugal and Greece are not in the same boat, and this is very visible when you look at the facts and figures," he told reporters on Thursday after the ECB decided not to change interest rates.
However, fears of a domino effect are not being allayed. And Wall Street certainly had the jitters on Thursday over fears the troubles in Europe could hinder a global recovery. At one point the Dow Jones plunged 1,000 points, although there are reports that the sudden drop was due to a typing error by a trader. Nevertheless, the Dow had already dropped by 200 points before the precipitous plunge and the selling spread to Europe and Asia on Friday.
Concerns over the possible shock waves from Greece are even prompting the finance ministers of the Group of Seven nations to discuss the bailout later on Friday in a conference call. US Federal Reserve officials have expressed concern and the White House has said that US President Barack Obama is watching developments closely.
"The Greece debt crisis is reminding investors of what happened after Lehman Brothers' collapsed," Kazuhiro Takahashi, a general manager with Daiwa Securities Capital Markets, told Reuters. "A failure by one financial institution ended up triggering a ripple effect on the global economy."