It took less than a week for confidence in the euro zone to evaporate. Again. Last Wednesday, European Union leaders agreed to sweeping measures aimed at saving the common currency. But the shocking announcement on Monday by Greek Prime Minister Georgios Papandreou that his country intended to hold a referendum on the conditions of the bailout measures, with its rigid and unpopular austerity measures, was all it took to shake markets again and raise doubts about the strength of the bailout.
As if that weren't bad enough, interest rates are rising on Italian government bonds again -- this week increasing to 6.4 percent and ever closer to the psychologically important 7 percent figure at which analysts believe the country will begin to have significant difficulties refinancing its debt.
On Thursday, even as Papandreou abandoned his referendum plans, he reinforced the image of a bumbling euro zone unable to get a grip on its currency crisis. His about face came within 24 hours of an emergency meeting with euro-zone leaders in Cannes -- and under tremendous pressure from German Chancellor Angela Merkel and French President Nicolas Sarkozy.
For the first time, the pair broke a longstanding taboo by raising the prospect that Greece might be forced to exit the euro. "We are prepared," Merkel said. And high-ranking representatives of the euro states said they were already reviewing scenarios of a Greek insolvency. On Thursday, Merkel reiterated her message, saying "our main concern is the stability of the euro."
Papandreou backed down after Merkel and Sarkozy threatened to freeze an €8 billion aid tranche until the referendum had been concluded. The Greek prime minister faces a crucial vote of confidence on Friday evening. more