G7: Europe must rescue Greece

FINANCE ministers and officials from the G7 countries, meeting in Canada yesterday, insisted there would be a “European” solution to the problems affecting Greece, Portugal and Spain and no need for an IMF rescue.

“We told our partners we had to solve the problem ourselves,” said Jean-Claude Juncker, chairman of the Eurogroup of finance ministers. The difficulties in Greece extended to Portugal and Spain last week, with credit spreads widening sharply, provoking a plunge in local stock markets.

Wolfgang Schaeuble, the German finance minister, said the problems would not undermine the euro but warned that Greece would have to make sacrifices.

“The euro will stay stable: markets always tend to overreact,” he said. “Greece has to realise that when you break the rules over a long period of time, you have to pay a high price.”
G7 finance ministers, who were meeting in Iqaluit near the Arctic Circle, said it was necessary to maintain economic stimulus until the recovery was established but also to plan for cuts in budget deficits. “The position for most countries is to support the economies now and get the budget deficit down as the economy recovers,” said Alistair Darling, the chancellor. “You will see a determination from the G7 countries to do just that.”

The recovery will be the key issue for the Bank of England when it presents its quarterly inflation report this week. Analysts expect the Bank to revise down its growth forecasts to take account of the slower pace of recovery so far, while revising up its inflation projections in the light of the current higher-than-expected rate.

Governor Mervyn King will concede that inflation in the first half of the year will be higher than the Bank expected and growth has been weaker. However, the Bank, which paused its £200 billion quantitative easing programme last week, is expected to maintain its view that spare capacity in the economy will bear down on inflation and that the current period of faster-than-expected price increases is temporary.

Business is nervous about the recovery. A survey of more than 400 firms by the British Chambers of Commerce, carried out for The Sunday Times, shows that three-quarters fear a “double-dip” recession.