Europe spirals toward new phase of debt crisis

Published May 14, 2012

Political paralysis in Greece, widespread protests in Spain and a vote against austerity in Germany on Sunday were threatening to send the European debt crisis into a critical new phase this week.

In Greece, the chances of politicians there forming a unity government all but evaporated, hurtling the country toward new elections and throwing doubt on whether it could remain a member of the eurozone and avoid defaulting on its debts.

Though President Karolos Papoulias, who held talks all day hoping to broker a coalition agreement, said Sunday night that he would keep trying today, the leaders of the main political parties remained adamant in their positions on the country's debt agreement with foreign lenders, making a unity coalition appear impossible and fresh elections all but inevitable.

Alexis Tsipras, the leader of the Coalition of the Radical Left, refused Sunday to take part in any government that would go through with the harsh austerity measures required in the debt deal, saying that Greek voters had resoundingly rejected austerity in elections on May 6. The parties that favor preserving the debt deal lack enough seats in Parliament to govern on their own, and Papoulias spent Sunday trying to persuade several smaller parties to join them.

European leaders have warned that if Greece does not keep its promises, Europe will stop financing it, which would quickly lead to Greece defaulting on its debts and ending its use of the euro currency.

Greece's political parties say any new government there must reflect the will of the people, who voted against the debt agreement and would probably take to the streets if a new government paid them no heed. But leaders have struggled to find a way to do so without reneging on Europe and Greece's creditors, which would provoke a cutoff of loans and leave the country unable to pay wages and pensions.

Now, unless there is a breakthrough, Papoulias will have to call a new election, most likely on June 17, and polls indicate that the Radical Left and other parties that oppose the debt deal will gather even more strength.

Tsipras and his coalition, known as Syriza, gained political momentum by defying Europe's threat to cut Greece off from further bailout funds.

Syriza placed second in the May 6 election with 17 percent of the vote, and polls since then suggest that it would win a new election in June. All told, the parties that backed Greece's $220 billion loan agreement with the European Commission, European Central Bank and International Monetary Fund won less than 40 percent of the vote.

The political wrangling in Greece highlights the clash developing across Europe between democracy and the demands of market forces.

Tens of thousands of Spaniards took to the streets during the weekend to protest austerity budget cuts and commemorate the anniversary Tuesday of a movement that inspired other groups on Wall Street and across the Western world.

Protesters gathered in about 80 Spanish cities, but one of the biggest turnouts was in Puerta del Sol, the Madrid square that almost a year ago became the center of a nationwide, youth-led movement seeking to overhaul Spain's political parties and other traditional institutions.

This time, however, the authorities had decreed that protesters would not be allowed to turn Puerta del Sol into an encampment and that any gathering there would have to end by 10 p.m. Instead, to reduce the risk that a standoff could turn violent, the police waited until 5 a.m. Sunday to clear the square, arresting 18 people. The protesters — known as the Indignados — are vowing to make further attempts to seize control of the square before Tuesday.

Underlining the extent to which Spain is fighting the economic crisis, the national government in Madrid warned during the weekend that it might need to take over the finances of Asturias, a northern region, because of concerns that the government there cannot meet deficit-cutting targets. Spain also announced further measures to shore up the banking sector.

Austerity measures were being blamed for the stinging defeat in elections Sunday suffered by the party of German Chancellor Angela Merkel.

Germany's Social Democrats won the parliamentary election in North Rhine-Westphalia, early results and exit polls released Sunday showed. Norbert Rottgen, the lead candidate for Merkel's Christian Democrats in the state, conceded defeat and said he would be stepping down as the head of the party there.

Exit polls for German public television showed the Social Democrats winning 39.1 percent of the vote, an increase of 4.6 percentage points from two years earlier. The Christian Democrats won just 26.3 percent of the vote, 8.3 percentage points less than in the previous election.

With the Green Party's 11.4 percent of the vote, analysts say the state premier, Hannelore Kraft, of the Social Democrats, will be able to easily form a left-wing coalition to govern the state. Rottgen ran against the debt-financed spending supported by Kraft, and even described the vote as a referendum on Merkel's Europe policies.

Merkel and her party hoped to sway the electorate with their hard line on Europe, painting Kraft almost as a domestic version of the kinds of spendthrifts the Germans complain about in Greece, Portugal and other places. Instead the voters handed Kraft, who pushed the state deeper into debt but hired more police officers and teachers and abolished fees for higher education, a significant victory.

Voters across Europe have expressed their displeasure with Merkel's path.

In France, Francois Hollande defeated President Nicolas Sarkozy, Merkel's close ally, in part by rejecting the German focus on austerity and promising more growth-oriented policies. Hollande is to travel to Berlin Tuesday to meet with Merkel to discuss the path forward for the Continent in crisis. The success of the Social Democrats in Germany could well give Hollande confidence in the difficult negotiations.

The Associated Press, New York Times, and Washington Post contributed to this report.