The Greek economy is shrinking fast as austerity takes its toll, putting at risk the next instalment of a massive bailout and raising new worries about the euro zone's survival.
European finance ministers met in Luxembourg Monday without coming to a final decision on releasing an €8-billion ($11.1-billion Canadian) instalment of a massive bailout Greece needs to stay afloat.
Eurogroup chairman Jean-Claude Juncker said the currency partners had asked the Greek government to make further savings in 2012 and 2013 to secure EU and IMF approval at a special eurozone meeting called for Oct. 13, leading to a "definite and final decision in the course of October," because Greece said it does not need €8-billion in blocked loans until November.
Euro zone countries continue to spar over whether to give bankrupt Greece more money, and on what terms.
The indecision is weighing heavily on global stock markets. The STOXX 50 index of European blue chips dropped nearly 2 per cent, while the U.S. benchmark S&P 500 dropped nearly 3 per cent and Canadian stocks dropped about 3.2 per cent as Greece's problems triggered broader worries about the global economy.
The euro also continued to tumble against the dollar, breaking through the $1.32 (U.S.) mark for the first time since early January, as investors worry about a possible Greek debt default.
Canadian Finance Minister Jim Flaherty said he isn't sure European leaders have the "appropriate sense of urgency" about the crisis. Speaking to BNN, Mr. Flaherty suggested that "the political will to act" is missing.
"These decisions have to be made," he told the network. "They don't get any better with the passage of time."
Euro-zone members remain deeply divided, not just about Greece, but about the need to more closely co-ordinate their economic and fiscal policies.
Finland, for example, is demanding that Greece put up more collateral before it will agree to the release of any more funds. And Germany and France – the two dominant powers in the euro zone – disagree on the terms of a second €109-billion rescue package tentatively agreed to in July.
German Chancellor Angela Merkel and French President Nicolas Sarkozy said they will meet next Sunday in Berlin as they lay the groundwork for the next European council meeting Oct. 17-18.
Both Greece and the future of the euro are expected to be on the agenda.
"I'm starting to think that the euro zone coming apart is the only realistic option," said Carleton University economist Nicholas Rowe. "Even if they get over Greece, there will be another crisis."
Over the long haul, almost total political and fiscal integration is needed to make the common currency work, and there is no appetite for that in Europe, Mr. Rowe said.
"There are too many people around the table who can veto the deal," he added.
Greek officials acknowledged over the weekend that the country's deficit this year will reach nearly €19-billion this year – nearly €2-billion higher than the target it agreed to meet as a condition of its bailout deal.
Greece is now caught in a Catch-22. The government must slash spending and raise taxes as a condition for getting the bailout cash it needs to pay for government salaries, pensions and operating expenses.
But the deeper Greece cuts, the more the economy shrinks and the less revenue it generates to manage its debts and eliminate its deficit. And the deeper the austerity, the more the Greek people push back, with violent strikes and protests.
As recently as July, the International Monetary Fund was forecasting that Greece would eke out 0.6 per cent growth next year. Now, it appears the economy will shrink 2.5 per cent in 2012 after a 5.5-per-cent slump this year.
And the more the economy contracts, the worse its debt burden becomes.
For its part, Greece said it is living up to its end of the bargain with a tough budget. Greece has taken all the necessary measures to meet its obligations next year, Greek Finance Minister Evangelos Venizelos insisted on his way into a meeting of euro-zone finance ministers.
With a file from AFP