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Eurozone crisis

European partners welcome new Greek cuts

With their positive vote, Greek parliamentarians met a crucial demand set by international lenders. But the EU's economic outlook is dim, and the German chancellor has said fundamental mistakes have to be corrected now.

The suport by Greek parliamentarians for the next round of austerity measures has been welcomed by the country's European partners.

German Foreign Minister Guido Westerwelle said in a written statement that the vote was a signal heard across the whole eurozone. "We have great respect for the efforts many people in Greece have made to overcome the crisis," the statement said.

'Step in the right direction'

This view was shared by the European Commission in Brussels. Wednesday's vote "is an important step in the right direction," said a Commission spokesman on Thursday (08.11.2012), adding, however, that there were still more hurdles yet to come.

The Greek parliament must pass a vote on the budget this Sunday, another "crucial step that needs to be taken in order to pave the way for the eurogroup on Monday to take forward the discussion," said Simon O'Connor, spokesperson for the EU's Commissioner for Economic and Monetary Affairs Olli Rehn. Eurozone finance ministers are expected to decide on Monday whether the next tranche of 31.5 billion euros ($40.1 billion) in bailout aid can be paid out.

European Economic and Monetary Affairs Commissioner Olli Rehn (photo: Yves Herman/ Reuters)

Rehn expects the crisis to continue for a while

O'Connor added that there would still be some discussion between the troika of international lenders and the Greek government regarding debt sustainability analysis and the future financing needs for Greece, but stressed that work was being done "in a good spirit" and that "we are working towards what we hope will be policy decisions on Monday."

Hours before Wednesday's vote, in his presentation of the autumn economic forecast for EU countries in Brussels, Rehn had already anticipated a positive outcome and said further measures were needed to reduce Greece's mountain of debts. "But everybody has to play their part - the EU, the IMF, and of course the Greek government and the parliament."

Gloomy outlook

Greece is not the only trouble child of the European Union, however. Debt levels in Italy are also causing increasing concern, according to Rehn's forecast. In addition, Spain and France are also set to fall short of their deficit targets in the next years. Overall, the outlook for Europe is gloomier than expected. "Europe is going through a difficult process of macroeconomic rebalancing, which will still last for some time," Rehn said.

Expectations for economic growth in the eurozone have had to be lowered again from minus 0.3 percent to minus 0.4. In 2013, experts are expecting the economy to pick up a little, but by a mere 0.1 percent - as opposed to previous expectations of 1 percent.

For the EU as a whole, the report predicted that the gross domestic product (GDP) would contract by 0.3 percent in 2012. Next year, the economy is expected to grow by 0.4 percent.

Some political decisions made over the last few months have indeed restored some confidence, Rehn added, but he said there was still no reason to sit back and relax. The EU had to combine budget consolidation with structural reforms to create sustainable growth and reduce unemployment, he said.

Protests in Athens (photo: Costas Baltas/ Reuters)

Despite protests, the Greek parliament agreed on heavy cuts

'Correct mistakes of foundation'

German Chancellor Angela Merkel went even further. In a debate with the heads of party groups of the European Parliament in Brussels on Wednesday, Merkel said she wanted the "mistakes of the foundation process" of the currency union to be corrected - and this could require changing the European treaties.

At their next meeting in December, Merkel expects the European Union's heads of state and government to decide on "an ambitious roadmap" for reforms to be tackled over the coming two to three years. One idea is to give "real authority over national budgets" to the European institutions. Merkel said she can envisage more coordination on the European level, "also in areas that concern national sovereignty. I'm thinking of sensitive policy areas like the labor market and taxes."

Some party group leaders of the European Parliament have criticized the strict austerity measures imposed on crisis countries like Greece, Portugal and Spain. MEP Hannes Swoboda, chairman of the Socialist party group, called for an end to the "failed experiment of austerity policy" and for a shift towards a policy of growth.

Along the same lines, Rebecca Harms from the Greens deplored a "one-dimensional crisis policy," while Liberal leader Guy Verhofstadt repeated his call for common European bonds, which he hopes could offer a degree of relief to the countries in crisis.

No alternative to strict course

Merkel opposes the so-called eurobonds because, in her view, they take away some of the pressure for reform needed to consolidate countries' budgets. When MEPs voiced their harsh criticism of the strict course towards Greece and other countries, she explained her view with unexpected passion.

"If you pretend that there is no urgent need for structural reforms then you're transgressing against the employees," she said. "If we continue to close our eyes in the areas where Europe has to change, where we've been taking things too easily -then we won't be able to guarantee wealth."

Merkel added that efforts were starting to pay off. "In Ireland, Portugal, Spain but also in Greece, unit labor costs have fallen drastically. And that's an important factor for countries' competitiveness."

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