Greek talks failure plunges euro zone into fresh financial turmoil

The failure of the country’s political factions to settle their differences in the interests of stability came as the newly-installed French President Francois Hollande was in Berlin arguing that the German-lead austerity strategy was too rigid and must be balanced with effective growth initiatives.

In a meeting with Chancellor Angela Merkel Mr Hollande demanded a relaxation of the new EU fiscal pact which tightly controls spending in the eurozone.

Coupled with the looming Greek election, Mr Hollande’s new growth drive is setting the scene for a dramatic showdown on EU economic strategy.

The prospect of Greek parties’ failure to form a coalition became inevitable after Socialist leader Evangelos Venizelos emerged from the latest failed meeting of political leaders to concede that no compromises on a workable administration were possible.

Another election is almost certain to deliver an even more decisive protest vote against severe austerity measures which have severely hit jobs and incomes and delivered little sign of economic recovery.

But the European Commission still insisted that any Greek administration – whatever its election mandate – would be expected to honour the national austerity policy agreed as part of multibillion-pound EU-IMF bailout packages to keep Greece afloat.

EU finance ministers in Brussels yesterday agreed new rules on bank liquidity as a hedge against further economic shocks to the banking system, but could do little else but watch in vain for a breakthrough in Athens.

Before talks finally broke down, Chancellor George Osborne insisted: “This is a time of considerable uncertainty in the eurozone economies and that uncertainty is undermining the entire European recovery and I think we are reaching a point where we have got to make a decision to see the eurozone stand behind their currency.

“A very important part of that of course is strengthening the entire European banking system.”

Prime Minister David Cameron’s official spokesman said Britain wanted to see “decisive action” to end uncertainty in the eurozone, but declined to discuss whether Greece should be offered a deal to allow it to stay in the single currency.

The Prime Minister’s spokesman told reporters: “One of the things that is fuelling uncertainty at the moment is the outcome of the elections in Greece, and clearly political uncertainty can add to economic uncertainty.

“But what we have been saying for the past year is that we require some decisive action across a number of fronts – resolving the uncertainty about Greece, strengthening the banks, making sure there is a ring-fence in place for the eurozone and a well-resourced bail-out fund, and then tackling those deeper structural problems to improve Europe’s competitiveness.”

Official figures have suggested that – unlike Britain – the eurozone and the EU as a whole avoided recession in the first three months of this year.

The 17-nation euro area saw GDP unchanged on the previous quarter, while across the 27 members of the EU GDP grew by 0.1 per cent, according to estimates produced by the EU’s statistical office Eurostat.

The stronger-than-expected performance in the first quarter of 2012 was largely due to growth of 0.5 per cent in the German economy. Growth was also seen in Finland (1.3 per cent) and Belgium (0.3 per cent), while France recorded zero growth.

Shadow chancellor Ed Balls said: “With Germany, France and the eurozone as a whole avoiding recession, it’s now clear that Britain’s double-dip recession was made in Downing Street by David Cameron and George Osborne’s failed economic policies.

“In the 18 months since George Osborne’s spending review, Britain has been out-performed by most European countries.”