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Greek central banker warns of break with euro zone

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The head of Greece’s central bank warned Tuesday that the country could be forced to break with the European Union if its politicians don’t stick with promised economic reforms after the May 6 elections, which threaten toss out the current ruling coalition.

The warning from Bank of Greece governor George A. Provopolous comes as a backlash against the euro region’s austerity drive appeared to gather steam,and derail the broad plans laid by European leaders to tame the financial crisis.

Greece’s current caretaker government recently accepted a new round of international bailout loans in return for efforts to overhaul Greece’s economy, including slashing the public work force and introducing more competition in a long list of professions protected by government regulation.

Polls have shown rising support for smaller political parties that oppose the austerity plan.

The campaign “has temporarily sidelined planned reforms,” Provopolous said in his annual report on the Greek economy. “If, after the elections, there is any question about the will of the new government and society to implement the program... the country will then be at risk of finding itself very soon in a particularly adverse situation.

“What is at stake is the choice between an orderly, albeit painstaking, effort to reconstruct the economy within the euro area, with the support of our partners, or a disorderly economic and social regression, taking the country several decades back, and eventually driving it out of the euro area and the European Union.”

Despite a recent lull in the some aspects of Europe’s problems, Provopolous’ remarks are a reminder that the currency union still faces a deep and difficult economic adjustment if it is to survive.

On Monday, the governing coalition of Dutch Prime Minister Mark Rutte collapsed after the populist Freedom Party, led by euro opponent Geert Wilders, abandoned negotiations over ways to meet national deficit targets. National elections are now expected to be held in June.

The Netherlands, which prides itself on fiscal prudence, has been one of the strongest advocates in Europe for strict deficit limits throughout the region. The Dutch government’s inability to raise the retirement age and take other budget-cutting steps could signal trouble for the German-led campaign for European austerity.

The strength of the blowback could become clearer after voters in France, Greece and Ireland head into a month of elections that amount to a referendum on Europe’s economic direction. The coming round of voting “could mark the beginning of a change to the entire euro zone crisis management,” analysts at ING wrote.

The fall of the Dutch government sent European stock markets down sharply on Monday, with the German DAX diving 3.4 percent. U.S. markets were off more than 1 percent.

The Netherlands — one of the few remaining European countries with a AAA credit rating — is on the verge of missing its budget targets. The Dutch upheaval is the latest development showing that the European debt crisis, which appeared to be ebbing in recent months as borrowing costs for cash-strapped governments declined, continues to pose a threat.

Last week, the International Monetary Fund warned that the recent lull should not be an excuse for the euro zone to slow the pace of economic overhaul or to assume that the worst of the crisis is over.

There is an increasing sense — at the IMF and elsewhere — that the drive for austerity across the euro zone has made the region’s economy worse. But there also are fears that a change of direction could lead investors to turn away from lending money to nations such as Italy and Spain — much as the markets already abandoned Greece, Ireland and Portugal — and force a new round of costly international bailouts.

The austerity programs introduced across Europe are, in theory, to be coupled with steps to make countries more competitive, boost economic growth and reduce historic rates of unemployment. But it could take time for the economic benefits to materialize. In the meantime, anger is rising among youths who can’t find jobs, public employees who face layoffs and older workers forced to work longer or retire with less.

After months in which Europe’s top leaders developed wide-ranging plans to address the euro’s troubles, voters will get their say.

French voters on May 6 will choose between President Nicolas Sarkozy and socialist challenger Francois Hollande, who has campaigned against tax increases, spending cuts and other steps aimed at preserving France’s credit standing.

Greeks also will pick a new government next month. The outcome will determine whether the country sticks to the extensive set of economic policy changes agreed to by Prime Minister Lucas Papademos in return for new bailout loans from the IMF and other European countries. Some polls have shown growing public support for small political parties opposed to the IMF program.

Late in May, Irish voters will decide whether to ratify changes to Europe’s main treaty that set deficit limits and new, more-centralized budget rules for euro-zone nations — measures advocated by Germany as a critical step in curing the currency region’s financial problems. A defeat of that “fiscal compact” would be a significant blow to the approach that German Chancellor Angela Merkel negotiated with Sarkozy and other European leaders.

More from Post Business: - Bank of Greece sees economy shrinking 5 percent in 2012 - Dutch government falls apart over austerity - Merkel defends drive for budget discipline

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