EU to Greece: We Want You to Stay, but Just in Case...

Reuters

European Union leaders, advised by senior officials to prepare contingency plans in case Greece decides to quit the single currency, urged the country to stay the course on austerity and complete the reforms demanded under its bailout program.

Thomas Lohnes | AFP | Getty Images

After nearly six hours of talks held during an informal dinner, leaders said they were committed to Greece remaining in the euro zone, but it had to stick to its side of the bargain too, a commitment that will mean a heavy cost for Greeks.

"We want Greece to stay in the euro, but we insist that Greece sticks to commitments that it has agreed to," German Chancellor Angela Merkel told reporters after a Wednesday evening summit in Brussels dragged long into the night.

Italian Prime Minister Mario Monti said on Thursday he believed Greece would remain in the euro zone, but it was impossible to say so with certainty.

"Anything can happen, but I think the most probable outcome is the one which is most positive for Greece and for all of us," Monti said in an interview on a television talk show, when asked if he believed Greece would to stay in the currency bloc.

Three officials told Reuters the instruction to have plans in place for a Greek exit was agreed on Monday during a teleconference of the Eurogroup Working Group (EWG) — experts who work for euro zone finance ministers.

The Greek finance ministry denied there was any such agreement but Belgian Finance Minister Steven Vanackere, said: "All the contingency plans (for Greece) come back to the same thing: to be responsible as a government is to foresee even what you hope to avoid."

Two other senior EU officials confirmed the call and its contents, saying contingency planning was only sensible.

In its monthly report, Germany's Bundesbank said the situation in Greece was "extremely worrying" and it was jeopardizing any further financial aid by threatening not to implement reforms agreed as part of its two bailouts.

It said a euro exit would pose "considerable but manageable" challenges for its European partners, raising pressure on Athens to stick with its painful economic reforms.

Greece's euro zone partners had been wrong to insist on a process of reforms and fiscal adjustment which was too fast for the country to withstand, Monti said.

"Europe has to learn how to not take too much of a short-term view," he said, adding the reforms needed in Greece would take a generation, rather than two or three years as its partners had demanded.

"Greece has lost its sovereignty, it's under the instructions of the IMF, the ECB, the European Commission. Having the others tell you, 'here is the money but I'm deciding,' must be a terrible terrible humiliation."

He earlier told a news conference that he did not expect it would be long before European countries were ready to introduce common euro zone bonds.

"Italy is very much in favor of the creation of euro bonds when the time is right, and we do not expect it to be too far off," Monti said during a news conference.

Greek officials have said that without outside funds, the country will run out of money within two months and there remains the threat that if it crashes out of the euro zone, other member states could be brought down too.

A document seen by Reuters detailed the potential costs to individual member states of a Greek exit and said that if it came about, an "amiable divorce" should be sought with the EU and IMF  possibly giving up to 50 billion euros to ease its path.

Although EU leaders' minds will have been focused by that prospect, disagreements have flared over a plan for mutual euro zone bond issuance and other measures to alleviate two years of debt  turmoil, such as giving countries like Spain an extra year to make the spending cuts demanded of them.

"The idea is to put energy into the growth motor. All the member countries don't necessarily share my ideas. But a certain number expressed themselves in the same direction," new French President Francois Hollande told reporters.

For the first time in more than two years of crisis summits, the leaders of France and Germany did not huddle beforehand to agree positions, marking a significant shift in the axis which has traditionally driven European policymaking.

Instead, Hollande met Spanish Prime Minister Mariano Rajoy in Paris to discuss policy, before the pair traveled to Brussels by train.

Despite fears Greeks could open the departure door if they vote for anti-bailout parties at a June 17 election, Spain, where the economy is in recession and the banking system in need of restructuring, is at the front line of the crisis.

After meeting Hollande, Rajoy said he had no intention of seeking outside aid for Spain's banks, which are laden with bad debts from a property boom that bust and still has some way to go before it touches bottom.

But his government said its rescue of problem lender Bankia would cost at least 9 billion euros and it is also seeking ways to help its highly indebted regions meet huge refinancing bills.

Turning to Italy, Monti told the television show said he was in favor of privatizing state assets to help cut debt, including utilities in the hands of local authorities, and the government would soon announce measures on this front.

However, he cautioned it was not possible to launch a massive privatization program like Italy did in 1990s, partly because of depressed market conditions and partly because so much had already been sold. Asked about reforms needed of Italy's banks, Monti said the most important thing was to integrate banking supervision at the European Union level, adding that this had been discussed at this week's meeting of EU leaders in Brussels.

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