Austerity Backlash Threatens European Stability

Riots in Greece, huge demonstrations in Spain and Portugal — the peace bought by the European Central Bank announcement earlier this month that they would buy unlimited quantities of debt from troubled euro economies appears to be broken as political instability now threatens to undo efforts to address the debt crisis.

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New York Times:

On Tuesday in Spain, tens of thousands of demonstrators besieged Parliament to protest austerity measures planned by Mr. Rajoy. Last week, more than half a million people marched in cities across Portugal to protest an increase in social security contributions, and a million marched in Barcelona calling for Catalan independence.

In Athens, trade unions called a nationwide strike Wednesday to contest billions of dollars in new salary and pension cuts being discussed by the government and its international creditors. It was the first such walkout since a conservative coalition led by Prime Minister Antonis Samaras came to power in June.

Samaras has his hands full negotiating a $15 billion austerity plan with his socialist coalition allies. The package is absolutely essential because the IMF, ECB, and EU government is currently in Athens examining the government’s efforts to get their budget deficit under control. At stake — a $40 billion tranche that Greece needs to stay afloat. Without it, they will be unable to pay their debt and will probably be forced to leave the euro.

Spain has different problems. It would be political poison if Rajoy were forced to go hat in hand to the IMF asking for assistance.

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Mr. Rajoy has been trying for months to convince investors that Spain can handle its own problems and that it will not need a bailout that would force Madrid to cede some authority over its fiscal affairs to its lenders, and is set to introduce new cutbacks to meet budgetary goals. Those will include restrictions on early retirement and various measures to streamline regulations and fight unemployment, he said in an interview with The Wall Street Journal.

But it is Greece where the real danger lurks for social unrest that would lead to political instability:

The proposed cuts in Greece have ignited new anger here, with many talking openly of increased impoverishment as the nation grapples with a third round of austerity measures in three years. The demonstrations here were peaceful throughout the morning, as civil servants, teachers, medical personnel, bank employees and lawyers made their way to the city center. A police spokeswoman put the turnout at 35,000 to 40,000 people — modest by Greek standards.

But violence broke out shortly after 1 p.m., as a group of protesters wearing black face masks hurled gasoline bombs at police officers on Vasilissis Sofias, a wide avenue abutting the Parliament building, sending bursts of flame and black smoke into the air. Firebombs were also thrown at the Finance Ministry and into the lush National Gardens next to Parliament. Crowds scattered inside Athens’s central Syntagma Square when similarly clad youths destroyed a tent and set part of it on fire.

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After a relatively stable few weeks, European stock markets plunged. Germany’s DAX index lost 2%. The Spanish stock market dropped nearly 4% and 10-year bonds inched toward the dangerous 6% range.

Just when Democrats are slapping each other on the back congratulating themselves on the coming Obama victory, a sharp reminder is given them that world events could easily trip up the president’s efforts at re-election and throw the race to Romney.

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