x Abu Dhabi, UAEThursday 20 July 2017

Lack of political will traps Europe in crisis mode

The euro-zone crisis is widening to Italy and the international leadership so urgently needed is nowhere to be found.

Fatally damaged by his blunder in announcing a surprise referendum on austerity measures, George Papandreou will abandon the Greek prime minister's office, clearing the way for a new national-unity government.

His gesture may, just barely, avert Greek insolvency for now. But Europe's debt crisis just keeps spreading. While the Greeks cobble together a new cabinet, Italian lawmakers are edging towards dropping Silvio Berlusconi, who has been prime minister for most of the last decade.

Mr Berlusconi, too, may have to give way to a national unity government, which could claim the moral authority to impose the austerity measures needed to satisfy the country's creditors. With markets increasingly anxious about Italian political will under Mr Berlusconi, yields on government bonds have been climbing inexorably and the International Monetary Fund is monitoring the country carefully.

Brian Cowen of Ireland, José Zapatero of Spain, José Socrates of Portugal, Mr Papandreou, perhaps Mr Berlusconi - all have been forced from office, one way or another, by voters' anger over the debt crisis. Nor is this over: France is about to unveil higher taxes and lower spending.

As political crises ripple outward from the debt epicentre, financial markets grow impatient with the series of transitory "solutions" proposed by Germany, France and international institutions.

These successive remedies do not really address the underlying problems, which are unsustainable levels of debt and differences in fiscal policy within the euro zone so that countries often work at cross purposes.

These problems require international leadership that weakened and overstretched governments evidently cannot provide. The choices are not easy: Greece looks ahead at years of austerity, a default that could cascade across its neighbours or, worst of all, exile from the euro zone. Yet Europe's leaders have not even been able to come up with a solution that assuages fears for more than a few days.

Greece, with just 11 million people, may yet be saved from default if it can present a plausible coalition government to those who were ready, a week ago, to bail out the Greeks and in the process offer a tolerable level of stability to those holding Greece's debts.

But as the contagion spreads to Italy, with an economy six times bigger and over $2.2 trillion (Dh8 trillion) in bonds outstanding, the question of Greece's continued use of the euro begins to seem like a very small issue indeed.