Larry Elliott, and Helena Smith in Athens
guardian.co.uk, Tuesday 15 May 2012 20.32 BST
Collapse of coalition talks plunges eurozone into fresh turmoil as EU policymakers work on plans for post-Greek single currency
As Greece's position within the eurozone looks increasingly fragile, a man walks towards a replica of a drachma coin outside Athens town hall. Photograph: Yorgos Karahalis/Reuters
Europe is facing a month of political and economic upheaval after the failure of nine days of coalition talks in Greece prompted fears on Tuesday that a fresh election in the crisis-torn country would herald the start of the breakup of the single currency.
In what was being seen in the financial markets as an "in or out" referendum on membership of the 17-nation eurozone, party leaders in Athens called a second poll next month once it became clear that they were unable to piece together a national unity government to manage Greece's biggest crisis in modern times. Karolos Papoulias, the Greek president, finally admitted defeat in his attempts to form a government and the date of the new election – either 10 June or 17 June – will be announced on Wednesday.
The collapse of talks sent tremors through financial markets and prompted warnings from Germany's finance minister, Wolfgang Schäuble, that Greece would have to stick to its hardline austerity programme in order to continue to receive the bailout cash needed to pay government salaries and support troubled banks.
Europe's policymakers are now actively working on plans to minimise the fallout from a possible Greek departure from the single currency after an election in which the anti-austerity Syriza party is expected to increase its support. Christine Lagarde, managing director of the International Monetary Fund, said she wanted Greece to stay in the euro but said the IMF had to be "technically prepared for anything".
In Berlin last night French president François Hollande and his German counterpart Angela Merkel stressed they were both in favour of keeping Greece in the euro.
"I want to reiterate that we are very united. We want Greece to stay in the euro. We also know that the majority of the people in Greece see it that way," Merkel said. But she underlined that Greece had to stick to its side of the deal regarding its debt management. "We think promises made have to be kept," she said, following brief talks with Hollande who flew to Berlin just hours after his inauguration. "We have said whatever we can do regarding structure and growth we'll do," she added.
Hollande, whose trip to Berlin was delayed for two hours after his plane was struck by lightning, said: "It's my wish that Greece stays in the eurozone … but we have to make it possible for Greece to find solutions to its problems."
Merkel said she wanted to stress the message particularly ahead of the new Greek poll in June. "We'll make clear that we have the expectation or wish that Greece stays in the Euro," she said, adding that she would be happy to hear of "any additional measures for growth either coming from Greece or that we can suggest to them if they want that."
Touching on the topic of encouraging growth which very much shaped his election campaign, Hollande added: "We need to be able to say to Greece Europe is ready to support further growth measures so that growth can return to Greece."
"We know we have an overwhelming and huge responsibility," he said.
He said he wanted Europe to pool its ideas on growth measures by the end of June.
He brushed aside fears that his and Merkel's ideas on how to solve the eurozone debt crisis differed too much to make them workable. Germany and France were united, he said.
"There are many people ... trying to emphasise the things that divide us. But we will work together for the future," he said.
News of the political impasse in Athens put paid to a modest rally in European markets on Tuesday caused by the surprise news that growth of 0.5% in Germany spared the eurozone collectively from the double-dip recession suffered by Britain. Growth in the monetary union area ground to a halt in the first three months of 2012, although the picture would have looked less rosy had statisticians in Europe followed the British tradition of adjusting data for the extra working day in a leap year.
David Owen, economist at Jefferies, said that in Germany alone the leap-year effect would added 0.4 percentage points to growth over a full year.
Official figures released on Tuesday showed that Italy's economy had shrunk by 1.3% over the past year, Spain had contracted by 0.4% and Greece by 6.2%. The length and depth of the slump in Greece – which has seen a 20% drop in output in the past four years – has led to the growing popularity for parties of left and right opposed to the terms of the €130bn bailout package agreed earlier this year.
No group won enough votes, however, to have a working majority in Athens's 300-seat parliament and parties that backed the terms of the bailout lost support.
The euro fell to its lowest in three and a half years against the pound on the foreign exchanges, while concern that a Greek exit from the single currency would have a domino effect pushed shares in Spain to their lowest in nine years. The interest rates paid by the Italian and Spanish governments for their 10-year borrowing were both above the key 6% level as concerns grew that the eurozone's third and fourth biggest economies might need bailouts from the IMF and the European Union.
A caretaker government will replace the outgoing left-right coalition, led by the technocrat banker Lucas Papademos, as the nation prepares for another round of election campaigning.
Attributing the breakdown to "petty party interests", Evangelos Venizelos, who heads the socialist Pasok, said he hoped the next decision of Greek voters would be more mature. "Unfortunately the country is being led again to elections … under very bad conditions," he said. "The country can find its way again," the politician insisted, before urging citizens to read the minutes of the two-hour-long talks. "Let's choose to go towards the better. In God's name, let it not be worse."
Like its longtime rival New Democracy, Pasok was pummelled in the 6 May election, a ballot that will be remembered for reconfiguring Greece's political map.
Athens is not only dependent on rescue funds from its "troika" of creditors – the European Union, the European Central Bank and the IMF – that rushed to prop up its ailing economy in May 2010. It is also running out of money fast.
With an €18bn cash injection for the banking system put on hold, a senior official in the outgoing government admitted there were concerns over whether Greece could "make it" until the next election.
"It is a real issue," he told the Guardian. "The economy is in very bad shape. "The banks have no money. There is no liquidity. It is vital that this cash injection is released by the EFSF [the EU's emergency rescue fund]."
Jonathan Loynes, chief European economist at Capital Economics, said: "There is now a considerable danger Greece simply runs out of money next month – that it can't pay wages, can't run public transport, can't maintain infrastructure and that the country just descends into complete chaos."
Greece's eurozone partners are likely to spend the next few weeks ratcheting up the pressure on the country's voters to back parties prepared to stick to the spending cuts, wage reductions, tax increases and privatisation included in the austerity programme. But the economist Nouriel Roubini said he expected Syriza, which wants to "tear up the barbaric accord" to emerge victorious, leading eventually to default and exit from the euro.
Chris Beauchamp, market analyst at IG Index, said: "The reality now is that there will be elections in mid-June, and at present the anti-bailout, leftwing Syriza party is poised to win a majority.
"If it does, it is pledged to abandon most austerity measures, which would result in the halting of bailout payments and likely result in the exit of Greece from the euro. After two years, this event now seems inevitable, barring some major turnaround in the Greek political climate."
Greece faces stark election choice – in or out of the euro | World news | The Guardian
