Deepening recession heats up talk of Greece exiting Eurozone

When the euro hit wallets and bank accounts on New Year’s Day a decade ago, champagne and fireworks greeted the Europeans' embarking on what was touted as an irrevocable course for prosperity and economic integration.

Over the years, though, as the economies of Greece, Spain and other Eurozone nations became mired in debt, expectations of a happy commune of affluence have given way to thoughts of breaking off the laggards to save the herd. What the Economist and other journals have referred to as a kind of "Hotel California that you can never leave" now looks to some to be exactly the hellish trap evoked by the Eagles in their 1970s ballad.

Greek officials disclosed this week that their economy shrunk 6.2% from April through June and that unemployment is close to 24% and rising. The shaky coalition government, confronted by strikes and protests against earlier austerity measures, has yet to identify the last $5 billion or so in budget cuts it must make to qualify for the next tranche of bailout funds due in September.

The bad news came as little surprise to the Eurozone’s better-off members, Germany first among them, which have complained for months that Athens has repeatedly failed to demonstrate the will to pare its bloated government payroll and get serious about collecting taxes.

A delegation of the so-called troika of creditors -- the European Commission, the European Central Bank and the International Monetary Fund -- visited Athens last month and is expected to issue a critical report on the Greek balance sheet in September. That has shifted the conversation from whether Greece will exit the Eurozone to how many other common currency users might follow.

Even Greek analysts have become dubious of the country’s prospects for living up to the commitments made to get triple-digit billions in bailout funds. They have been issuing gloomy forecasts of an inevitable Greek exit -- or Grexit, as it has come to be called -- perhaps preparing the public for an eventual return to the drachma.

“The political system once more showed how counterproductive it is. Instead of designing a workable state, it tries to reproduce the one that already exists,” the Greek daily Kathimerini’s columnist Paschos Mandravelis groused Monday. In his analysis, titled “On another planet,” he accused the government of protecting well-connected allies and unproductive state jobs.

A week ago, Greek Finance Minister Yannis Stournaras said the government was still looking for about a third of the $15 billion in cuts to the 2013-14 budgets demanded by the troika in exchange for vital cash infusions. Debt inspectors are due back next month for a final review of whether Athens has gotten its finances in order, a judgment expected to be negative unless the government forces through deeply unpopular budget cuts and privatization plans in the final few weeks.

Elsewhere in the common currency club, the mood has changed from one of steadfast commitment to keeping the 17-nation Eurozone intact to mounting resignation that at least Greece will have to go.

Athens’ potential departure "has long since lost its horrors," German Economy Minister Philipp Roesler told ARD television recently. Luxembourg Prime Minister Jean-Claude Juncker, who chairs Eurozone finance ministers’ meetings, observed last week that a Greek exit would be “manageable.” On Monday, when German Chancellor Angela Merkel returned from a hiking vacation in the Italian Alps, she was confronted with even more dismissive comments by her coalition partners.

“An example must be made of Athens that the Eurozone can also show teeth,” Markus Soeder, Bavarian finance minister and member of a conservative sister party to Merkel’s Christian Democratic Union, told the Bild am Sonntag newspaper. He contended that Germany can ill afford to keep bailing out spendthrift euro members and that “further help to Greece is like pouring water into the desert.”

In the Economist cover story this week, a mock memo to Merkel on a possible Plan B advises her to consider two options to her current course of scrambling to hold the Eurozone together. One envisions Greece's departure, which alone could cost the euro area $398 billion in debt write-offs and transitional aid. The other scenario, in which Portugal, Ireland, Cyprus and Spain would also leave, could cost the rump Eurozone $1.4 trillion but halt the slow bleeding of bailouts to the struggling periphery, the respected London-based publication calculated.

Charles A. Kupchan, a professor of international affairs at Georgetown University and former European affairs director on the National Security Council under President Clinton, attributes the growing Grexit talk to an emerging consensus among economists that Athens' departure is a question of when, not if.

"Behind the scenes the European Union is making preparations for a Greek exit to contain the damage," he said of the latest assessments of the Eurozone's integrity.

Grexit would be manageable because of Greece's small economy and the fact that its finances are unlikely to ever meet Eurozone standards, Kupchan said. But he sees other departures as potentially destabilizing for the whole monetary union experiment.

"When you start talking about the Spanish or the Portuguese or the Irish leaving, that's a new ballgame," he said. "That's not a controlled exit of a member or two; it's a complete overhaul of the Eurozone."

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Photo: Mario Draghi, president of the European Central Bank, has pledged to do whatever it takes to protect the euro common currency. But mounting debts and persistent recession in some of the peripheral countries of the Eurozone have turned the conversation to managing the departure of Greece, instead of preventing it. Credit:  Hannelore Foerster / Bloomberg

British royal family member among riders in equestrian event

LONDON -- British horse lovers and royal watchers alike on Monday rooted for Olympic rider Zara Phillips, granddaughter of Queen Elizabeth II.

Phillips and her aptly named horse, High Kingdom, powered round a  grueling cross-country course in Greenwich Park. They achieved 10th place at the end of the second day of the Olympic equestrian three-day event, which saw almost a fifth of the participants fall or fail to finish the course.

More than 50,000 fans basking in a day of sun and games spread themselves out over the 180-acre city park, home to the Meridian line and a historic naval museum. The crowds cheered as riders and their horses jumped over obstacles, splashed through water and twisted and turned around a treacherous 3.5-mile course of obstacles with names like The Planet and the Moon, the Coffin and the Altar. 

Whoops, applause and some gasps – when a horse or rider fell -  followed every competitor, but the crowd clearly supported the 31-year-old royal Olympian.

"The noise of the crowd was completely deafening. I couldn't even hear my watch beeping at the minute markers," Phillips told Reuters later.

Phillips had plenty of support from family including cousin Prince William and his wife, Catherine, William’s brother, Harry, and Camilla, wife of her uncle, Prince Charles. Phillips' mother, Princess Anne, a former Olympic rider, watched too.

Phillips helped the British team reach second place in the overall team rankings, behind the German team.  Tuesday’s equestrian competition features show jumping.

“I was really impressed," said fan Anna Patrick, 45. "She deserved her place on the team, and not because she’s a royal." 

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Photo: Zara Phillips of Britain rides High Kingdom as she competes in the cross-country phase at Greenwich Park at the 2012 Summer Olympics in London. Credit: Markus Schreiber / Associated Press 

Queen Elizabeth, ex-IRA leader share historic handshake

LONDON -- In a meeting symbolizing the end of years of enmity between British rule and Northern Ireland republicans, Queen Elizabeth shook hands Wednesday with a former Irish Republican Army commander.

Martin McGuinness, now a deputy first minister of Northern Ireland and a member of the pro-republican Sinn Fein party, was a senior IRA member in the years of sectarian violence. During that time, the group was responsible for blowing up the yacht of Lord Louis Mountbatten, the queen's cousin, killing him and three others while they vacationed off the coast of Northern Ireland in 1979. 

The once unthinkable handshake took place away from media eyes -- apart from one camera crew -- behind closed doors at a charity arts event in Belfast, witnessed by the queen’s husband, Prince Philip, and leading politicians including Irish President Michael Higgins and Northern Ireland’s first minister, Peter Robinson.

The seemingly mundane greeting was widely heralded as a turning point. Peter Sheridan, host of the event, told reporters, "It's a huge act of reconciliation, you cannot underestimate how important this is."

The queen, wearing a pale green coat and hat, also toured a local art exhibit, the work of a cultural charity aimed at fostering cross-community relations between Catholics and Protestants. As she left the Lyric Theatre, the carefully chosen apolitical context where the event took place, the queen smiled as she shook hands again with McGuinness, this time publicly as he was standing in line with other officials.

Afterward, McGuinness told reporters he spoke to the queen in Gaelic telling her his words meant “Goodbye and God speed.”

The show of reconciliation was generally judged to have cost both leaders a price. Some hard-line republicans view McGuinness as a traitor, but most agreed that it was a step forward.

"From the queen's point of view, she lost a member of the family, so it's a big step for her," Joe McGowan, a Northern Ireland historian, told Sky News. "Martin McGuinness is conceding something. He has to recognize that the struggle over the past 30 years was lost, in a military sense anyway."

Roy Foster, a professor of Irish history at Oxford University, told the BBC before the meeting that “a lot is going to have to be forgotten. It's hard to think that the queen can forget that Martin McGuinness was chief of staff [of the IRA] when Lord Mountbatten was blown up in 1979 ... and the extraordinary statements from the IRA after the event ... that they'd only done to Mountbatten what he'd spent his lifetime doing to other people."

On the other hand, he said, the occasion could help repair political damage to McGuinness' party after Sinn Fein boycotted the queen's visit in May 2011, the first by a reigning British monarch since Ireland gained independence from Britain in 1922. That trip won approval from the majority of the Irish population.

The two-day royal trip, part of the queen’s diamond jubilee tour of Britain, was heavily policed but also feted by thousands of cheering crowds as the monarch and Prince Philip walked along streets of Enniskillen after their arrival Tuesday. The town was the scene of a devastating 1987 IRA bomb attack that killed 11 people.

Yhe visit was also marked by the action of small groups of anti-royalist protesters. On Tuesday night, nine police officers were wounded as they broke up a demonstration of about 100 youths throwing petrol bombs in West Belfast.

The area was once a stronghold of urban guerrilla warfare in the 30-year sectarian war waged between extremist Catholic IRA republican groups and Protestant Unionist pro-British movements, which a British army campaign battled to subdue until the gradual withdrawal of troops after a peace agreement in 1998.

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Myanmar's Aung San Suu Kyi on historic European visit

NEW DELHI -- Pro-democracy leader Aung San Suu Kyi of Myanmar enjoyed her first full day on European soil in 24 years on Thursday, the beginning of a 17-day visit that includes stops in Switzerland, Norway, Britain, Ireland and France.

In addition to her address Thursday to the U.N. International Labor Organization in Geneva, highlights will include a long-delayed acceptance speech Saturday in Oslo for the Nobel Peace Prize she received in absentia in 1991.

"I'm excited about each country in a different way," Suu Kyi, 66, said on Wednesday before her departure from Yangon airport in her homeland. "I'll get to know this only when I get there."

The Myanmar parliamentarian, who spent 15 years in detention or under house arrest before her by-election win in April, had repeated opportunities over the past quarter century to leave Myanmar. In fact, the brutal military regime that long ruled the country would have welcomed her departure. The problem was always getting permission to return and continue her fight for more political and social rights in the long-isolated country, which is also known as Burma.

“Symbolically, the trip is deeply significant,” said Sean Turnell, a professor at Australia’s Macquarie University and editor of the Burma Economic Watch blog. “And it’s a nice moment of fulfillment personally, finally getting the Nobel prize.”

Eurozone crisis: A love-hate relationship imperils the currency

The Irish voted "with a heavy heart" this week to tough out the hardships of remaining a member of the Eurozone. Greek and French voters protested the pain of austerity last month by throwing out leaders who had been slashing jobs and services to reduce debt. Spain and Italy may be more committed to the belt-tightening required to shore up the euro, but skeptical investors could undermine those sacrifices by waging a run on their banks.

Europeans have been lurching from one crisis to another for the last four years as recession wreaked havoc with many of the 17 Eurozone economies that have too little in common beyond the coins and banknotes they use. Some of the world's most influential economists now worry that crisis could escalate to catastrophe if Greeks heed the siren song of a fiery leftist telling them they can keep their euros but renege on austerity measures they promised in exchange for bailout funds.

A German-led effort to get the bloc's financial houses in order has exposed flaws in the common currency's management and ambivalence among euro users about the continent's ambitious goals for economic integration. What is accepted by frugal, savings-minded Northern Europeans as laudable restraint in public spending has sown resentment in Eurozone countries ravaged by high unemployment, teetering banks and withering cuts in social services.

Ireland's vote to approve the fiscal treaty signed this year by 25 of the European Union's 27 member states was a convincing 60.3% in favor. But politicians on both sides of the issue acknowledged that it was a hard pill to swallow for a country struggling to meet its obligations after being bailed out by Eurozone colleagues in 2010.

Ireland had one of the highest deficits in the Eurozone three years ago, but it has cut spending and debt enough to see prospects for emerging from a four-year recession. Small signs of economic improvement -- a marginal drop in unemployment last month and a hint of growth over the last year -- were enough to push the Irish to commit to the Eurozone's collective debt-reduction goals by endorsing the treaty.

"The astonishing thing about this campaign was that lots of people voted 'yes' with a heavy heart, and many voted 'no' with a heavy heart," said Joan Burton, Ireland's social protection minister, citing concerns in both camps about the treaty's potential constraints on spending to create jobs.

The long-term good may not be so prominent in the minds of Greek voters when they go to the polls June 17 to choose among candidates making brash and contradictory promises about Greece's future in the Eurozone. Alexis Tsipras has moved his radical left Syriza party to the political fore, according to the latest poll, with his vow to bail on the bailout terms and his dubious assertion that Greece would nevertheless retain use of the euro.

“The first act of a government of the left, as soon as the new Parliament is sworn in, will be a cancellation of the bailout and its implementation laws,” Tsipras told boisterous supporters Friday when he outlined the party's economic platform.

All recent polls in Greece have shown Syriza and the conservative New Democracy Party running a close battle for popular support, but neither likely to get enough votes to form a government on its own. That threatens a repeat of the fractured May 6 vote and futile attempts among the irreconcilable parties to form a coalition government. The latest survey -- and the last before a two-week moratorium on polling ahead of the election -- on Friday showed Syriza almost doubling its share of the vote captured last month, with 31.5% support compared with 25.5% for New Democracy, which finished first on May 6.

In a sign of the disarray afflicting Greece, the country didn't manage to update its unemployment statistics for the last three months for an EU report released Friday showing a euro era-high 11% joblessness across the currency union. In February, the last month for which Athens has released figures, 21.7% of Greeks were out of work.

More job cuts and tax hikes were due to be imposed this month ahead of the next payment of bailout money from Brussels. Those cuts have been essentially suspended in the absence of an elected government.

As Eurozone residents hold their breath awaiting the next Greek vote, more immediate worry has settled on Spain, where national leaders are urging fellow Europeans to help rescue Spanish banks saddled with defaulted loans issued during a building boom in the years before recession hit in 2008. Spain last week promised troubled lender Bankia nearly $24 billion to keep it afloat, but borrowing rates have soared to record highs -- nearing the 7% rate that pushed Ireland, Portugal and Greece over the edge and forced them to seek bailouts.

Spain, the fourth-largest economy in the Eurozone, may be too big to bail out, economists say, spreading fears for the future of the entire common-currency project.

The EU commissioner for monetary and economic matters, Olli Rehn, warned during a speech in Helsinki, Finland, on Friday that "the way things are going and under the current structures, the euro area has a significant risk of breaking up."

Eurozone states have "extremely tough decisions ahead, and it’s important to face the truth,” Rehn said, alluding to suggestions among other financial leaders that contingency plans should be drawn up to cope with the worst-case scenarios being threatened from several euro states.

Earlier this week, the European Commission called for creating a "banking union" that would allow the bloc's financial institutions to invest directly in troubled national banks, rather than force already indebted states to take on further obligations at unsustainable interest rates. But Germany has resisted the idea of pooling its sterling credit with other euro users, and Chancellor Angela Merkel also remains steadfast against loosening the spending shackles on struggling states to allow them to invest in growth.

The standoff amid possibly impending catastrophe has alarmed financial experts around the globe.

"The Eurozone is experiencing three crises at the same time -- a fiscal crisis, a banking crisis and a growth crisis," said former U.S. Treasury Secretary Robert E. Rubin, now at the Council on Foreign Relations, citing weak political leadership in Europe and deep concern for the situation in Spain. "If the Eurozone continues to unravel, not only will that have very serious consequences for the Eurozone, but I believe it will have serious and maybe even severe consequences for the entire global economy, including the United States."

In a commentary Friday in Britain's Financial Times, World Bank President Robert Zoellick drew disturbing parallels between what is happening now in Europe and the financial crises that were the bellwethers of the 2008 collapse on Wall Street.

"Events in Greece could trigger financial fright in Spain, Italy, and across the Eurozone," Zoellick wrote, saying that the summer ahead had "an eerie echo of 2008."

Eurozone leaders need to be ready to recapitalize banks if spooked investors rush to withdraw their euro-denominated assets, he said.

"There will not be time for meetings of finance ministers to discuss the outlook and debate the politics of incrementalism," Zoellick said. "In panicked markets, investors flee to safe assets, sparking other flames."

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Photo:  Alexis Tsipras, leader of Greece's radical left Syriza, presents the party's economic program in Athens on Friday. Tsipras vowed to cancel harsh austerity measures demanded by the Eurozone leaders in return for bailouts of Greece's heavily indebted economy. Credit: Simela Pantzartzi / European Pressphoto Agency.

Eurozone unemployment rate remains at record high [Map]

Unemployment in the 17 countries that use the euro remained at 11% last month, the highest it has been since the currency was introduced, according to new data released by the European Union.

More than 17.4 million people in the region were out of work last month, a troubling increase as the Eurozone grapples with how to muscle out of its debt crisis.The newly released figures testify to the continued pain across Europe as it struggles with competing demands to rein in spending and nurture growth. 

That pain is far worse in some countries than others: Spain suffered a 24% joblessness rate, the worst in the European Union. A banking crisis there has sunk stock prices and alarmed investors fearful of a run on Spanish banks. Borrowing rates have soared to precarious heights.

Greece was close behind with nearly 22% unemployment, while Latvia and Portugal tied around 15%. (Greek figures date to February.) The lowest rates were in Austria, Germany, Luxembourg and the Netherlands, where unemployment rates ranged from roughly 4% to more than 5%.

Despite the grim numbers, there were some hopeful signs for the European Union. Though the unemployment rate grew in 15 EU nations, it fell at least marginally in 12 others, including Ireland, where voters signed off on a European treaty to limit government spending despite opponents' frustration with austerity cuts.

This map spotlights the EU nations suffering the highest unemployment rates, shaded in orange, and those with the lowest, tinted in blue:

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Irish voters appear to approve European fiscal treaty

This post has been updated. See below for details.

LONDON -– Irish voters have apparently approved their country's adoption of a European treaty to limit government spending, despite a vigorous opposition campaign and signs that the Eurozone debt crisis is deepening regardless of the historic accord.

Full results from Thursday's referendum are not expected until later in the day, but officials in both the "yes" and "no" camps said Friday morning that the pact had passed.

[Updated, 8:07 a.m. June 1: Officials results have been released. The referendum was approved, with 60.3% voting for the pact and 39.7% voting against it.]

The treaty, born of Europe's ongoing debt crisis, obliges signatory countries to keep their budget deficits to 3% of gross domestic product or less and caps the amount of government debt they can rack up. Breaching the rules can result in heavy fines.

Out of the 25 European Union nations that have signed up to the agreement, Ireland is the only one to put it to a popular vote. Lawmakers in several other EU countries have already ratified the pact, though not in Germany, its biggest backer.

Voter turnout in Ireland was lackluster, however. And critics across Europe note that the new pact on future budget restraint does nothing to address the immediate financial crisis engulfing the region, where fear is growing daily that recession-racked Spain may have to follow Greece, Ireland and Portugal in requesting an international bailout.

The "yes" campaign in Ireland argued that approving the treaty was vital for the country's continued participation in the EU and also for Dublin's continued access to bailout funds. Some analysts predict that Ireland, where a real-estate bubble and banking collapse drove the economy into a deep hole, will have to ask for another rescue package on top of the one it received a year and a half ago.

Opponents of the treaty warned that Ireland was surrendering some of its hard-won sovereignty. They also objected to the harsh austerity cuts that Ireland has imposed in exchange for being bailed out by its European partners and the International Monetary Fund.

The early indications that the pact had cleared its Irish hurdle did little to rally investors. By midday Friday, most of Europe's main stock indexes had lost ground.

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Photo: Election workers in Dublin count votes Friday in Ireland's referendum on whether to accept a European treaty limiting public spending. Credit: Peter Morrison / Associated Press

Ireland votes on treaty aimed at controlling Europe's deficits

LONDON -- Irish voters went to the polls Thursday in a referendum on a treaty aimed at controlling the runaway deficits of European Union countries.

The voting is being watched throughout Europe. Ireland is the only country to put to the EU plan, instigated by Germany early this year, to a public vote. Irish constitutional law requires public approval on major reforms.

The treaty calls on member states to limit spending and stick to budgetary targets. It aims to coordinate EU fiscal and budget policies and hold annual structural deficits within 0.5% of gross domestic product, with bailout funds from the European Stability Mechanism available to those who ratify.

Fines are to be imposed on those who fail to comply with debt targets.

Of the 27 EU nations, Britain and the Czech Republic have opted out of the treaty, which must be ratified by 12 of the 17 Eurozone states by next March. So far, Romania, Slovenia, Portugal and Greece have approved it. 

Polls indicate that the treaty will pass, but Ireland has a quixotic record on EU treaties.  Two previous referendums -- on EU enlargement in 2001 and a more streamlined EU administration in 2008 -- were rejected by Irish voters, then accepted in a second vote after amendments. This time there will be no second vote for Ireland.

But Irish voters are expected to reluctantly favor more austerity and continued access to EU rescue funding. Ireland has already been saved by a massive European bailout of $108 billion in 2010.

Although one poll shows the treaty passing with 60% support, there is also the specter of low turnout. 

In a last appeal before the balloting, Prime Minister Enda Kenny urged Ireland's 3.1 million voters to "vote yes on Thursday, yes to stability, yes to investment," and give greater credibility to Ireland when it takes over the EU presidency in January.

Fierce criticism of the measure has come from the Sinn Fein opposition party, once the political arm of the outlawed IRA revolutionaries of Northern Ireland but now a legitimate and popular left-wing force in Northern Ireland and the Irish republic. Party leader Gerry Adams told voters not to give up their say over Irish economic policy and "not to write austerity into the Constitution."

Results of the vote are expected to be known by Friday.

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Photo: Posters for and against the EU fiscal treaty are seen outside government buildings in Dublin, Ireland. Credit: Peter Morrison / Associated Press

Germany signals willingness to boost Europe's bailout fund

REPORTING FROM BERLIN -- Bowing to international pressure, German Chancellor Angela Merkel signaled Monday that her country could agree to a boost in Europe's bailout resources for financially ailing nations, a move she and other German leaders had resisted in their attempts to beat back the euro debt crisis.

Merkel told a gathering of her fellow Christian Democrats that it might be possible for Europe's temporary rescue fund to run in tandem with its permanent successor. The arrangement would see the 200 billion euros (about $265 billion) already earmarked for bailouts of Greece, Ireland and Portugal operating alongside the 500 billion euros (about $665 billion) committed to the permanent rescue fund, known as the European Stability Mechanism, or ESM. The ESM is scheduled to come online this summer.

"We could see the 200 billion euros running parallel to the ESM's 500 billion euros until they've been paid back by the bailed-out countries," Merkel said Monday.

But after that, Merkel insisted, the permanent bailout fund would remain set at 500 billion euros and shouldn't be enlarged beyond its current size.

Vatican issues report on Irish church child abuse investigation

REPORTING FROM ROME -– In a report summarizing the results of an internal investigation of Irish dioceses and seminaries, the Vatican on Tuesday acknowledged “with a great sense of pain and shame” that minors and young people had been abused by the very figures they trusted most.

The investigation, or Apostolic Visitation, was ordered by Pope Benedict XVI in response to the widespread sexual abuse of minors by priests in Ireland and subsequent coverup that had been detailed in at least two damning reports commissioned by the Irish government.

The Vatican said that in issuing the eight-page summary, “The Holy See re-echoes the sense of dismay and betrayal which the Holy Father expressed in his Letter to the Catholics of Ireland regarding the sinful and criminal acts that were at the root of this particular crisis.”

In that March 2010 public letter, Benedict promised to root out the problem, which had been ignored by church authorities for decades. The investigation involved four dioceses, four seminaries, including the Irish College in Rome, and religious orders in Ireland and Northern Ireland.