Europe's future on a knife edge, Merkel says

Turmoil as euro and markets drop amid rioting in Athens.

Berlin // The euro slid to new lows yesterday, stock markets around the world fell and the German chancellor Angela Merkel gave a warning that the future of Europe hung in the balance as the Greek debt crisis engulfing the euro zone reached violent new heights. "This is about nothing less than the future of Europe and thereby the future of Germany in Europe," Mrs Merkel said.

She was speaking at a turbulent session of parliament called to approve Germany's portion of the EU and IMF's aid package, which could total €120 billion (Dh568.58bn), to stave off a Greek debt default. "The eyes of Europe are on Germany today. Europe is at a crossroads," Mrs Merkel said. The German parliament yesterday held its first reading of emergency legislation to lend Greece €22.4bn over three years. It plans to pass the law by tomorrow.

Germany is providing the lion's share of the EU aid even though the package is deeply unpopular among Germans, who resent the fact that Europe's largest economy is the continent's traditional paymaster. Mrs Merkel indirectly criticised the decision in 2000 to accept Greece into the euro zone, pointing out that its accession had been a political decision by Europe's leaders and had been accompanied by "scepticism and doubt".

The chancellor, who faces an important regional election on Sunday, has been accused of exacerbating the crisis because she blocked a bailout for weeks to extract greater concessions from the Greeks. But she defended her hesitation, saying: "A good European is not necessarily someone who provides quick help, but someone who helps in a way that avoids damaging the euro zone." The deaths of at least three people in riots in Athens yesterday fuelled global fears that the Greek government would not be able to impose the radical cuts it had agreed to in return for the bailout. Tens of thousands of Greeks staged protests, and public and private sector workers across the country shut down airports, tourist sites and public services in a general strike against pension cuts, wage freezes and tax rises.

Markets were further unsettled by media reports that major budget holes would remain in Greece's finances in 2013 and 2014, and that the government had not yet come up with plans to plug them. Meanwhile, more than US$1.1 trillion (Dh4.04tn) was wiped from global stocks yesterday amid concern that rescues similar to Greece's would be needed in Spain and Portugal. Stocks sank around the globe, erasing the gain so far this year for the MSCI World Index. The MSCI gauge of equities in 23 developed nations declined 1.8 per cent in New York morning trade, leaving it down 1.5 per cent for the year, while the Standard & Poor's 500 Index fell 1.2 per cent to an almost two-month low.

Spain's IBEX 35 Index slumped 3.3 per cent to the lowest since July. The euro lost more than 1 per cent against the dollar for a second day. Copper slid below $7,000 a tonne. Crude oil fell below $80 a barrel and the 10-year Treasury yield plunged eight basis points to 3.5 per cent. Asian stocks fell, extending the biggest slump in global equities in three months. Shares of commodity producers led the declines in Asia after the Reuters/Jefferies CRB Index of 19 raw materials fell 2.3 per cent yesterday, the biggest slide since February 4.

Germany's chief financial market watchdog warned that the European currency was under assault from speculators. "At the moment, speculators are waging a war of aggression against the euro zone," Jochen Sanio, the head of the independent Federal Financial Supervisory Authority, told a parliamentary committee in Berlin. He said "malign forces" from the "shadow financial sector" were at work and that this sector needed to be rooted out.

Mr Sanio's comments came as the euro slid below $1.29 to its lowest level in more than a year on concern that the crisis would spread. Analysts said the outlook for the euro zone remained bearish and that the currency could hit $1.25 soon if it broke through technical support at $1.2880. The currency is likely to keep on falling because of the risk that the crisis could halt the euro zone's fragile economic recovery and plunge it back into recession.

Interest rate differentials with the US are another factor weighing on Europe's single currency. With signs that the US economy is picking up pace, the Federal Reserve is expected to start hiking interest rates sooner than the European Central Bank (ECB). The German Federation of Exporters said the euro could reach parity with the dollar by the end of this year. Adding to the torrent of bad news, the European Commission predicted yesterday that the budget deficits of the 16 euro zone nations would reach 6.6 per cent of GDP this year - more than twice as high as the deficit limit originally set for members of the single currency.

Axel Weber, an ECB council member, said Greece's fiscal crisis was threatening "grave contagion effects" in the euro zone, which justified Germany's contribution to the aid package. [e-mail]