France to approve Greek bail-out amid recession fears

8th September 2011, Comments 0 comments

French lawmakers were to approve their part of the latest eurozone bail-out package on Thursday, as the OECD warned that some developed countries may be at risk of another recession.

The Senate, France's upper house, was expected to approve both France's contribution to a fund to bail out Greece's ailing economy and President Nicolas Sarkozy's domestic austerity plan.

The 160-billion-euro plan was agreed by eurozone leaders on July 21 but has suffered a number of political setabacks around the continent and some experts warn that it may now be insufficient to halt the debt crisis.

Greece revealed on Thursday that its economy had shrunk by another seven percent in the second quarter, as the Organisation for Economic Cooperation and Development warned growth is slowing in the industrialised world.

The OECD called for the bail-out to be enacted quickly and called for further measures to recapitalise European banks, many of which are seen as overexposed to sovereign debt.

France, the 17-nation eurozone's second-biggest economy, will be the first to approve its part in the bailout -- after German Chancellor Angela Merkel's bid to ratify her side of the bill ran into a legal challenge.

Germany's constitutional court finally ruled that the pay out was legal on Wednesday, providing relief to jittery European markets, but the package still faces stiff political opposition.

The bail-out, the second to be offered to Greece, will not come fully into effect before next year, and several European governments are pushing Athens to stick more closely to IMF guidance over its austerity programme.

French economic growth was stagnant in the second quarter, forcing the government to revise growth forecast and calling into doubt Sarkozy's plan to reduce his own yawning deficit.

Markets have been unimpressed by the limited French austerity measures, already watered down by lawmakers in his own centre-right party, seven months before he is due to seek re-election.

"If we do nothing it'll be a catastrophe. If we do too much it'll be a recession," Sarkozy reportedly told lawmakers, insisting deficit-reduction must not be allowed to hurt growth and jobs.

On Thursday, in another blow, the French audit office announced that the social security budget deficit has reached a record high of 30 billion euros.

Many observers have warned that the crisis in the eurozone is such that the survival of the single currency is itself in question, with some calling for a single eurobond market to pool national debt. However, the German constitutional court appears to have blocked this.

The so-called PIIGS -- Portugal, Italy, Ireland, Greece and Spain -- are seen as the weakest, and taxpayers in richer northern countries are chafing having to fund their debts.

In the strongest comments yet, Dutch Finance Minister Jan Kees de Jager warned on Thursday that some countries might be forced to leave the euro.

"If a country doesn't want to comply with the requirements, then there is no other option than to leave it," he said. "If you can't stick to rules, you have to leave the game." However, there are no legal provisions for a country to leave the eurozone.

Germany's Finance Minister Wolfgang Schaeuble also ratcheted up pressure on Greece, warning it to heed IMG advice and control public spending if it expects the second aid package to be ratified.

"The debate over a second aid package to Greece is very premature given the current difficulties around the payment of the first package," he said.

Sarkozy has also urged eurozone countries to adopt a so-called "golden rule" obliging governments by to present budget plans aiming at rapidly balancing their books.

© 2011 AFP

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