The eurozone was fighting on four fronts on Friday, with deficits clouding growth, Greek membership at risk, Spanish banks in trouble, and the outlook hanging on talks between paymaster Germany and a new French president.
EU forecasts showed the eurozone heading for only a slow recovery from recession later this year and still struggling with budget deficits, limiting the options if governments want to bolster growth.
Meanwhile Greece, the epicentre of the debt crisis, was in limbo as political leaders tried to form a government after voters Sunday rejected the austerity policies agreed in exchange for a massive EU-IMF bailout deal.
Socialist leader Evangelos Venizelos, who backed the debt rescue plan as finance minister, has been tasked with forming a coalition by Saturday after the largest two parties failed, with new polls a distinct possibility.
Germany, the EU’s strongest economy, insisted on Friday that whatever the outcome, Athens must stick to the terms of the bailout accord.
German Finance Minister Wolfgang Schaeuble appeared to suggest the eurozone could cope if Greece left, noting: “Europe won’t sink that easily.
Whether Germany can hold the line on Greece may depend on relations with France, the second-biggest eurozone economy where an anti-austerity backlash in Sunday’s presidential poll helped put Socialist Francois Hollande in office.
German Chancellor Angela Merkel openly supported the loser Nicolas Sarkozy in the election and the ‘Merkozy’ power couple had appeared confident that they would continue to set the rules on resolving the eurozone crisis.
Hollande, who campaigned strongly for a much greater focus on growth, meets Merkel on Tuesday for an exchange on the crisis which could be crucial.
He said that Merkel wanted to sound Hollande out on “his ideas about fiscal discipline and the promotion of economic growth and jobs and to present Germany’s convictions and what in our view Europe has already accomplished since the issue of growth started playing a key role on the European level at the end of last year.”
Spain, seen by many as the next possible victim of the debt crisis after Greece, Ireland and Portugal were bailed out, may be high on the agenda.
The Spanish government presented yet another programme on Friday to stabilise a banking sector crippled by the collapse of the property market, an economy in recession and soaring unemployment.
The key to success is finding a way to ring-fence the mountain of bad property loans sitting on the banks’ books without Madrid having to keep them afloat with ever more billions it cannot afford.
Bank of Spain figures show commercial banks held problematic real estate assets including loans and seized property of 184 billion euros ($238 billion), 60 percent of their property portfolio at the end of 2011.
The government said the Spanish banks will have to set aside another 30 billion euros to cover their exposure and remove bad property assets from their balance sheets.
The government will also charge two independent auditing firms with valuing banks’ exposure to the property sector, ministers said.
Moneycorp noted that “analysts reckon between 50 billion euros and 100 billion euros will be needed” to save the banks, raising the risk that Spain may need a bailout if it can raise such funds itself.
As for the vital question of economic growth, the European Commission said Friday in its spring forecasts: “A recovery is on the horizon but it will be a long and stony road before the EU economy reaches sustained growth.”
It pointed to continuing strains in public finances in some countries, including France.
Economic activity is estimated to have contracted in the first quarter of 2012 after shrinking at the end of last year, officially putting the eurozone in recession, the commission said.
The eurozone economy is forecast to shrink 0.3 percent this year but grow by 1.0 percent in 2013 while unemployment will stay at a record 11 percent.