Thursday’s political agreement in Athens after four days of dithering calmed financial markets, coupled with the prospect that volatile Italian Prime Minister Silvio Berlusconi will be leaving office sooner rather than later.
But significant challenges remain in both debt-heavy Mediterranean countries.
Lucas Papademos, former vice president of the European Central Bank, must quickly secure the crucial loan installment without which his country will go bankrupt before Christmas, and approve the EU’s Oct. 26 $177 billion bailout deal. In Italy, lawmakers have to pass new austerity measures over the next few days.
Papademos called for unity Thursday and promised to seek cross-party cooperation to keep Greece firmly in the 17-nation eurozone.
“The participation of our country in the eurozone is a guarantee for the country’s monetary stability. It is a driver of financial prosperity,” Papademos said after getting the mandate to form a cabinet. “I am not a politician, but I have dedicated most of my professional life to exercising financial policy both in Greece and in Europe.”
The 64-year-old, who also served as a former Bank of Greece governor, will lead a government backed by both Greece’s governing Socialists and the opposition conservatives that will operate until early elections, tentatively set for February. Papademos replaces outgoing Prime Minister George Papandreou, midway through his four-year term.
The new Greek cabinet will be sworn in on Friday. There has been no announcement on its composition, and officials said negotiations continued late Thursday.
But two government officials and two opposition lawmakers said Evangelos Venizelos was expected to retain the critical finance minister portfolio.
“I can’t see how the minister who brought about the Oct. 26 agreement cannot be part of the government,” said one of the government officials. “He, more than everyone else, knows exactly what needs to be done during the short period that lies ahead (until the elections.)” All four spoke to The Associated Press on condition of anonymity because they were not authorized to discuss the issue.
Papademos’ selection came as Italy wrestled with its own government crisis, with economist Mario Monti appearing to be in line to run an interim technocratic government after Berlusconi goes.
Italy’s borrowing costs shot up alarmingly Wednesday on fears that Berlusconi would linger in office, but the markets calmed Thursday when it appeared that Italian lawmakers would approve the latest government austerity plans in the next few days and Berlusconi would resign after that.
Monti, 68, now heads Milan’s Bocconi University, but he made his reputation as the European Union competition commissioner who blocked General Electric’s takeover of Honeywell.
Europe has already bailed out Greece, Portugal and Ireland — but together they make up only about 6 percent of the eurozone’s economic output, in contrast to Italy’s 17 percent. Italy, the eurozone’s third-largest economy, is considered too big for Europe to bail out. It has a mountain of debt —2.6 trillion — and a substantial portion of that needs to be refinanced in the next few years.
Many European stock markets rose on the twin Greek and Italian developments, while in the U.S. the Dow Jones industrial average was up 1.5 percent, a day after shedding 3.2 percent. The euro was also in demand, trading 0.5 percent higher at $1.3609.
In Athens, shares closed 0.64 percent down after rising 1.6 percent on news of Papademos’ appointment.
Greek analyst Platon Monokroussos said hopes have been raised that the new prime minister will help the country regain its lost international credibility.
“Of course the new government will fight an uphill battle to implement a very austere adjustment program in Greece, very significant structural reforms, and this creates a lot of challenges,” said Monokroussos, who is head of financial market research at Eurobank. “But overall, today’s outcome is positive.”
European officials greeted the Greek news with relief.
“The agreement to form a government of national unity opens a new chapter for Greece,” said a joint statement by European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy.
They stressed that “it is important for Greece’s new government to send a strong cross-party message of reassurance to its European partners that it is committed to doing what it takes to set its debt on a steady downward path.”
The interim government’s mandate includes passing last month’s $177 billion European debt deal that took months to work out, and ensuring the country receives the next $11 billion installment of its initial $150 billion bailout.
Under the new deal, private bondholders will forgive 50 percent — or some $136 billion — of their Greek debt holdings so the country can get its massive debts under partial control.
Eurozone officials are withholding the next loan installment until Athens formally approves the new debt deal. They have also demanded a written pledge from five officials: Papandreou, opposition party leader Antonis Samaras, the head of Greece’s central bank, the new prime minister and the finance minister.
“The letter has to arrive,” said Guy Schuller, spokesman for Jean-Claude Juncker, who chairs meetings of eurozone finance ministers.
Samaras earlier had reacted with outrage to that demand, saying it was an insult to national dignity.
Many Greeks are deeply angry after 20 months of government austerity measures, including repeated salary and pension cuts and tax hikes to meet the conditions of the country’s first bailout. Despite the belt-tightening, the Socialist government repeatedly missed its financial targets as Greece fell into a deep recession, amid rapidly rising unemployment that surged to 18.4 percent in August — close to double the EU average.
Outraged labor unions have held repeated strikes, with many protests setting off riots.
Some 2,000 members of a Communist party-affiliated labor union held a peaceful anti-austerity march through central Athens late Thursday.
The European Union, meanwhile, warned that the 17-nation eurozone could slip back into “a deep and prolonged” recession next year amid the debt crisis. The European Commission predicted the eurozone would grow a pallid 0.5 percent in 2012 — much less than its earlier forecast of 1.8 percent. EU unemployment will be stuck at 9.5 percent.
Papademos’ appointment followed 10 days of political turmoil and Byzantine machinations triggered by Papandreou’s shock announcement that he wanted to put the latest European bailout deal to a referendum. Fears that the democratic vote could go against the agreement led to mayhem on international markets and angered both European leaders and his own Socialist lawmakers.
Bowing to pressure, Papandreou agreed to resign and reached a historic power-sharing deal with Samaras on Sunday to form a transitional government.
Papademos, who is not a member of any party, has been operating lately as an adviser to the prime minister.
He taught at Columbia University and worked at the Federal Reserve Bank of Boston before returning to Greece, where he headed the central bank from 1994 to 2002 after helping fend off a speculative attack on the drachma, Greece’s pre-euro currency.
At the Bank of Greece’s helm, Papademos presided over an era of increasing independence from the government that was crucial in helping Greece secure membership in the eurozone. He then spent eight years at the European Central Bank.