As David Cameron tells MPs that Europe must be prepared for Greece leaving the single currency, eurozone officials call for contingency planning to start.
Two eurozone officials have confirmed to the Reuters news agency that during a teleconference on Monday it was agreed that each eurozone country should prepare an individual contingency plan to deal with a Greek decision to leave the single currency.
The agreement came during a meeting of the Eurogroup Working Group (EWG), which consists of officials who prepare meetings of finance ministers. An official explained that no plans had been drawn up at the eurozone level previously “for fear of leaks”.
David Cameron, who is attening a key EU summit in Brussels on Wednesday, told the House of Commons that Greece’s economic problems were “the greatest risk facing the eurozone” and “I don’t believe we can afford to allow this issue to be endlessly fudged or put off”.
He added: “The Greek elections should in effect be a straighforward choice between staying in the eurozone, with the responsibilities that entails, or taking a different path. The eurozone, and Europe as a whole, needs to have contingency plans in place for both eventualities. This should involve strengthening banks, protecting financial systems and ensuring decisive action by European institutions to prevent contagion.”
Greece is heavily in debt and its government can only afford to keep functioning because of bailouts from the EU and IMF. The fear is that Greece’s problems could spread to other indebted eurozone countries, like Spain and Italy.
France will argue in favour of eurobonds at the Brussels summit, but will meet resistance from Germany, which believes their introduction would encourage indebted countries to take their foot off the austerity pedal.
French President Francois Hollande has the backing of Italian Prime Minister Mario Monti and the European Commission. Germany is also resistant due to fears that wealthier eurozone countries, like itself, would be left underwriting the debts of poorer states and would mean higher borrowing costs for nations in better financial shape.
Paola Subbachi, a senior economist at the Chatham House think tank in London, told Channel 4 News that eurobonds “look like the most sensible option on the table at the moment”, but she understood the objections.
“It’s like you have parents with a good financial record and they have a grown-up son who’s unemployed and wants to borrow more money. Should the parents be prepared to support his reckless habits? It’s the same situation with Greece and Germany.”
Ms Subbachi said eurobonds would bring down borrowing costs for countries like Greece, but “they’re not going to happen tomorrow”. Another option was to beef up the role of the European Central Bank (ECB) to make it the eurozone’s lender of last resort, which would calm the markets.”The ECB would be the ultimate defence,” she said.
The ECB has already played a role in the eurozone debt crisis, lending money to banks at comparatively low interest rates which these institutions have used to buy government debt. What it has not done is lend money directly to countries.
Another idea is the creation of project bonds, borrowing instruments backed by EU money that can be used to finance energy, transport and telecoms projects alongside private sector investment.
A pilot programme, using 230m euros, will run until 2013 and if successful could lead to up to 4.6bn euros of new investment, according to EU officials.
Read Political Editor Gary Gibbon's blog on why a breakthrough on eurobonds is not going to happen
After inconclusive election results on 6 May and the failure to form a government, Greek voters go to the polls again on 17 June. The radical leftist party, Syriza, which came second in the elections, is opposed to the austerity measures Greece is implementing in return for bailouts from the EU and IMF.
Channel 4 News has visited Lavrio, a town where Syriza won more support than any other party, and spoken to people grappling with unemployment of 40 per cent and 30 per cent cuts to pensions.
They are trying to cut everything off, even benefits. They are trying to make it impossible for us to breathe. Giorgos Sidiropoulos
Christos Gotsis, in his early 20s and unable to find a holiday job as a waiter, was asked to sum up his predicament. He said: “No jobs, no money, so no life.”Asked who he blamed, he said: “The Greek government first, and then Germany.”
Channel 4 News talked to Giorgos Sidiropoulos, who lives in a shack with his wife and five children. He has been told his electricity will be cut off because he cannot afford to pay his bills. He recently had his water supply restored after the local Communist party intervened.
He said: “I would just ask Europe to help poor people, to help them find work, and stop trying to take money away from people who don’t have any. At the moment I can’t afford health insurance for my kids if something goes wrong.They are trying to cut everything off, even benefits. They are trying to make it impossible for us to breathe.”
Athanasia Markouli will be voting for Syriza for the second time next month because of its resistance to austerity. She said: “They (the eurozone) need us. Otherwise there will be a problem for the whole of Europe.”
Even a christening in Lavrio failed to lift spirits. When one man was asked what sort of Greece the baby was entering, he said: “Very difficult, very black.”