Israeli-Iranian Conflict

Scenarios: Global Impact If Israel Strikes Iran

Reuters
March 29, 2010

If Israel were to strike Iran over its nuclear activities, markets would be watching one thing only -- Iran's response.

The scale of that response could be the difference between a brief spike in oil prices and pushing the world back to economic crisis.

Below are possible scenarios together with projected potential market reactions suggested by analysts, economists and foreign policy strategists.

NO IMMEDIATE REACTION

Tehran announces that Israel's military attacked civilian locations but inflicted little damage. It hurls furious rhetoric at Israel but stops short of any military response.

"It may make sense for the Iranians to play the victim," said IHS Global Insight Middle East analyst Gala Riani. "They may also use it to build the regime's legitimacy internally."

-- news of the strike would see oil prices spike $10-$20 and wider investor flight to safer assets such as U.S. treasuries, while equities and risky currencies would suffer. But without further action, sentiment would recover.

-- relatively used to conflict, Israeli markets might prove more resilient to the initial news. Some analysts suggest that a successful strike that significantly put back an Iranian nuclear program could be positive for Israeli markets.

Key unknowns:

-- assessing the effectiveness of an attack on Iranian facilities could prove almost impossible. The longer-term impact of the strikes on Iran's internal politics, regional politics and Western support for Israel would be hard to predict.

-- can Israel achieve its aims with a single strike, or would it require a more sustained operation potentially lasting several days and hitting markets much harder?

PROXY RETALIATION

Iran steers clear of any overt response, but backs intensifying attacks by Hamas from the Palestinian territories and by Hezbollah from Lebanon. It might also back proxy attacks on Western forces in Iraq and Afghanistan.

"The most likely response would be to increase their subversive activity across the Middle East," said IHS's Riani. "It would most likely be focused in Palestine, Lebanon and to a lesser extent around the Gulf."

-- might have some short-term impact on oil prices -- particularly if the attacks included Iraq -- but generally global markets would be little affected.

-- Israeli markets would likely take initial attacks in their stride, but a prolonged campaign would drag on the economy, driving up defense spending and undermining markets as they did during the Palestinian Intifada.

Key unknowns:

-- the duration of increased violence. Proxy violence could escalate to include militant attacks on Western and oil targets.

-- If Hezbollah strikes Israel, Israel will retaliate in a way that quickly expands the conflict. Israel has threatened to hold the governments of Lebanon and Syria responsible for any Hezbollah attacks.

MISSILES STRIKE ISRAEL

Iran retaliates by launching ballistic missiles with conventional warheads. While more accurate than the Scuds launched by Iraqi leader Saddam Hussein at Israel during the 1991 Gulf War, damage from each strike would be limited.

"It's certainly not something you can rule out," said Metsa Rahimi, intelligence analyst for risk consultancy Janusian. "The Iranians are going to want to retaliate. But they know if they do this, they are going to get hit back again."

-- oil prices would certainly spike higher, although attacks on Israeli cities would not directly have any impact on oil production. Wider global markets would sell off and watch nervously for any further escalation.

-- Israeli markets might again prove more resilient. They actually rallied in January 1991 during the missile attacks as it became clear the strikes were not chemical and not causing significant damage. Much would depend on the level of damage and for how long any missile barrage continued.

Key unknowns:

-- Israeli and Western reaction. Would there be further retaliation? Would weapons used remain conventional?

-- Would Israel strike military targets and civilian infrastructure in Iran, possibly including oil facilities? That would push-up prices and force primary customer China to look for supplies elsewhere.

CLOSING HORMUZ

Iran makes good its threat to close the Straits of Hormuz to traffic, blocking the flow of some 17 million barrels a day of oil, roughly 40 percent of all seaborne oil trade -- but likely inviting swift retaliation from United States forces.

"Iran doesn't even need to be successful in their threat," said Michael Wittner, global head of energy research at Societe Generale. "Even a credible threat or near miss and insurance rates will spike. Then no one's going to send any oil through there for a couple of weeks until somebody's navy can re-establish control."

-- analysts estimate this could push oil prices up toward $150 a barrel. Alternative oil producers such as Russia, Nigeria and Angola might benefit, but rising fuel costs would likely undercut growth everywhere. China, Iran's main export destination, would have to seek supplies elsewhere.

-- Other financial markets would suffer and fall sharply if they believed disruption would be long term.

-- Israeli markets are likely to be affected by the wider frenzy, although probably less than volatile emerging markets.

Key unknowns:

-- how long could Iran maintain its blockade? Military analysts believe its handful of mine-laying ships, helicopters and submarines might quickly be neutralized by the US military.

SPARKING WIDER CONFLICT

Ultimately, the consequences of an Israeli strike on Iran are hard to predict. At worst, it could fuel an upsurge in wider regional violence.

"I worry a great deal about the unintended consequences of a strike," Chairman of the US Joint Chiefs of Staff Admiral Mike Mullen said on a recent visit to Israel.

-- a more violent Middle East would put an inherently higher risk premium on oil, pushing up prices and possibly undermining global recovery from the financial crisis. It might also drive consuming nations toward non-Middle Eastern suppliers and alternative technologies.

-- investors would also view Israel as much higher risk, while much higher defense spending would weigh on the economy.

Key unknowns:

-- duration and severity of any conflict. Would the world's wider powers -- China, Russia, the United States and European Union in particular -- move toward a consensus on the Middle East or would the conflict exacerbate their differences further?

Israeli-Palestinian Conflict

Quartet to Israel: Freeze Settlements

JewishSearch.com
March 19, 2010

Top international diplomats on Friday called on Israel and the Palestinians to return to peace negotiations with a goal of reaching a final settlement that would create an independent Palestinian state within 24 months.

The statement further condemned "the decision by the government of Israel to advance planning for new housing units in east Jerusalem." Last week, during US Vice President Joe Biden's tour of the region, an Israeli building an planning committee had announced that 6,000 additional housing units would be built in Ramat Shlomo, a primarily haredi neighborhood near Ramot and adjacent to the Shuafat refugee camp.

The so-called Quartet peacemakers met in the Russian capital and issued a formal statement read by UN Secretary General Ban Ki-moon.

Joining the UN chief at the Moscow meeting were US Secretary of State Hillary Rodham Clinton, Russian Foreign Minister Sergey Lavrov, EU foreign policy chief Catherine Ashton, and the Quartet's special representative, former British Prime Minister Tony Blair.

Lavrov told a joint news conference that the Israelis and Palestinians should move first to indirect talks, followed by face-to-face negotiations. Those indirect talks were to have started last week but were stalled by reaction to Israel's announcement of new housing in east Jerusalem.

Clinton said she expects to see Prime Minister Binyamin Netanyahu in Washington next week.

"We are all committed to the launching of proximity talks between the Israelis and Palestinians," Clinton told reporters.

A spokesman for Netanyahu had no comment on the statement.

George Mitchell, the US Mideast peace envoy, is to meet in coming days with Israeli and Palestinian leaders in hopes of getting the process restarted. Mitchell attended Friday's talks.

The fragile situation is Gaza was one of the key focuses of the Quartet's formal statement. The diplomats expressed concern at the humanitarian situation there.

The Israeli air force responded early Friday to a rocket attack by Gaza terrorists the day before, in which a Thai worker was killed, by striking six targets in southern Gaza. The Israeli military identified the targets as three weapons-smuggling tunnels; two other tunnels that militants were digging to infiltrate into Israel; and a weapons workshop. No injuries were reported.

The rocket and the Israeli retaliation raised the specter of further conflagration at a time of renewed international focus on the Israeli-Palestinian conflict.

In a nod to Israeli security concerns, the group condemned the rocket attack and called for calm to be respected.

They also took "positive note" that the Israeli government recently endorsed a number of United Nations civilian recovery projects in Gaza, including a stalled housing project.

The group also called for the immediate release of captured IDF soldier St.-Sgt. Gilad Schalit, who has been held by Gaza's Hamas rulers for more than three years.

After Israel's announcement last week of new Jewish housing in Jerusalem, the Quartet issued a statement of condemnation but did not formally meet to discuss the matter.

"Unilateral actions taken by either party cannot prejudge the outcome of negotiations and will not be recognized by the international community," it said in the March 12 statement.

The Quartet has consistently called for Israel to restrain settlement activity.

In a formal statement after its last meeting, in September 2009, the Quartet urged Israel to freeze all settlement activity and to "refrain from provocative actions" in east Jerusalem. It also called on the Palestinian Authority to continue to make efforts to improve law and order, to fight violent extremism and to end incitement.

Iran

Saudi Arabia Seeks Strike on Iran

By IsraelNN.com
March 19, 2010

The German news magazine Der Spiegel has reported that Saudi Arabia is hoping Israel will strike Iran's nuclear facilities, and is even prepared to open its skies to Israeli warplanes to allow such an operation to take place. Similar reports were published in 2009, and denied by both Israel and Saudi Arabia.

The Der Spiegel report stated that officials in Riyadh had spoken to United States Secretary of State Hillary Clinton about the importance of stopping Iran's nuclear program, even if doing so requires the use of military force.

The London Sunday Times claimed in 2009 that Saudi Arabia would allow Israel to use its airspace to attack Iran. The paper quoted a former Israeli intelligence officer as saying:

“The Saudis are very concerned about an Iranian nuclear bomb, even more than the Israelis.”

Der Spiegel writer Bernhard Zand stated this week:

“These days, the Arabs fear the terrorists of al-Qaeda and Iran's leadership, with its rabid rhetoric and nuclear program, as much as the Israelis do. Never before since the time of Israel's creation were Jews and Arabs as united as they are in the face of the Iranian threat.”

Zand accused Prime Minister Binyamin Netanyahu of failing to take advantage of Israel's newfound common ground with the Arab world.

Iranian media dismissed the Der Spiegal report.

“Der Spiegel is greatly influenced by the Israeli regime and has previously published reports that were meant to serve as an Israeli propaganda campaign or psychological warfare against the Islamic Republic,” accused Iran's Press TV.

The fear of terrorist takeovers of their governments and of Iran's weaponization is the reason several Arab regimes, such as Saudi Arabia and Egypt, do not protest with U.S. military offensives against al-Kaeda and other terrorist groups in Afghanistan and Iraq, even though they are not part of the CENTCOM coalition that fights alongside the U.S. These regimes are worried that the U.S. response to Iran will be too little and too late, according to a JINSA (the American based Jewish Institute for National Security Affairs) analysis of the issue this week.

Israel, the U.S. and the Arab World

Netanyahu to Ask Obama for Weapons to Strike Iran

By Haaretz Service
March 21, 2010

Prime Minister Binyamin Netanyahu will use a visit to Washington this week to press the U.S. to release advanced weapons needed for a possible strike on Iran's nuclear sites, the Sunday Times reported.

Ahead of his departure Sunday night, Netanyahu bowed to U.S. demands and promised the administration of U.S President Barack Obama that Israel will make several goodwill gestures toward the Palestinians. For the first time since Operation Cast Lead, Israel has agreed to ease the blockade on the Gaza Strip. Netanyahu has also agreed to discuss all core issues during the proximity talks, with the condition of reaching final conclusions only in direct talks with the PA.

But according to the London weekly, Netanyahu will also seek returns for the concessions, asking Israel's closest ally to provide the IAF with sophisticated 'bunker-buster' bombs needed to break through to Iran's nuclear enrichment installations, many of which are buried underground. Israel and the West accuse Iran of using its enrichment program to build a nuclear bomb, a charge Tehran denies.

Obama's predecessor, George W. Bush, is believed to have refused previous Israeli requests for the GBU-28 bombs, as well as for upgraded refuelling tanker aircraft that would enable a long-range airstrike on Iran. But Netanyahu may have a tough task before him in persuading Obama to arm Israel for a strike and current U.S. strategy appears to favor a diplomatic, rather than a military, solution to the Iran's dispute with the West.

On Sunday Obama used the occasion of the Persian New Year to send a video message to Iranians in which he renewed last year's American offer of engagement to end the nuclear standoff. So far, Western attempts to lure Iran into a compromise have met with little success, however, and Iranian President Mahmoud Ahmadinejad has rejected offers to enrich his country's uranium abroad.

On Saturday Ahmadinejad issued his own, more combative New Year's address to Iranians, in which he said that Iran would resit Western pressure even more determinedly in the coming year.

"Enemies have tried to weaken our country but they have failed and in the coming year we will stand even more firmly against them than before," he said.

Reports on Saturday that United States was transporting 387 of the high-tech bunker-busting bombs to its air base on the island of Diego Garcia in the Indian Ocean appeared to indicate that despite his diplomatic efforts, Obama has not ruled out an American strike in Iran.

U.S. Iran Sneak Attack?

Israeli-Palestinian Conflict

Israel: No Building Restrictions in East Jerusalem

Associated Press
March 22, 2010

Israel will not restrict construction in east Jerusalem, Israel’s prime minister said Sunday hours before leaving for Washington, despite a clear U.S. demand that building there must stop and a crisis in relations between the two longtime allies.

Benjamin Netanyahu’s hardline statement came just hours before he was scheduled to leave for Washington.

His meeting with President Barack Obama Tuesday will be the first high-level meeting since the crisis erupted 10 days ago, when Israel embarrassed visiting U.S. Vice President Joe Biden by announcing a plan for construction in a Jewish neighborhood in east Jerusalem, which is claimed by the Palestinians.

“As far as we are concerned, building in Jerusalem is like building in Tel Aviv” and there would be no restrictions, Netanyahu told his cabinet.

This tough stance on Jerusalem has run into stiff opposition in Washington, but there were signs that Israel was working to ease the crisis. Cabinet ministers said that while there would be no formal freeze, construction in Jewish neighborhoods in east Jerusalem would be restricted, like Netanyahu’s partial 10-month West Bank construction freeze.

At stake are the first peace contacts between Israel and the Palestinian government in more than a year.

The Palestinians agreed to mediated talks, but the Jerusalem construction flap has given them second thoughts. Israel said it prefers direct negotiations but would go along with the indirect format.

On Sunday, Netanyahu met with Obama’s special Mideast envoy, George Mitchell, who is set to mediate. He delivered the White House invitation to the prime minister.

At the meeting with Netanyahu, Mitchell said:

“Our shared goal ... is the resumption of negotiations between Israelis and Palestinians in an environment that can result in an agreement that ends the conflict and resolves all permanent status issues.”

U.S. officials have been dialing back the crisis rhetoric in recent days. The fact that a such a meeting was scheduled—even though the original purpose of Netanyahu’s trip was not to meet Obama but to address a convention of AIPAC, the pro-Israel lobby—is a likely indication that the U.S. and Israel are succeeding in ironing out their differences.

The diplomatic package Netanyahu is offering the U.S. to ease the bilateral crisis has not been made public, but officials say one element is agreement to discuss all the outstanding issues with the Palestinians in indirect peace talks Mitchell is set to mediate. Those would include the future of Jerusalem, as well as borders, Jewish settlements and Palestinian refugees.

Netanyahu has always opposed compromise over Jerusalem. Israel captured the city’s eastern sector from Jordan during the 1967 Middle East war and annexed it, a move not recognized by any other country. Over four decades, Israel has built a string of Jewish neighborhoods around the Arab section of the city.

Most Israelis consider them part of the Jewish state, but Palestinians equate them to West Bank settlements, considered illegal under international law.

Previous rounds of unsuccessful peace talks have included a formula for Israel retaining the Jewish neighborhoods while Palestinians got sovereignty over the Arab sections, but Netanyahu pointedly took that off the table when he took office a year ago.

In Gaza Sunday, U.N. Secretary-General Ban Ki-moon called on Israel to end its blockade on Gaza, imposed after Palestinian militants captured an Israeli soldier in 2006 and tightened when the Islamic militant Hamas overran the territory the following year. Israel allows only basic humanitarian supplies into Gaza.

The blockade causes “unacceptable suffering” and “undercuts moderates and encourages extremists,” Ban said after visiting a housing project in the Khan Younis refugee camp.

“My message to the people of Gaza is this: The United Nations will stand with you, through this ordeal.”

Most of the 15,000 homes destroyed or damaged during Israel’s war in Gaza last winter have not been repaired because of the ban on importation of most building supplies. Israel launched the war after years of militant rocket fire from Gaza.

In West Bank violence Sunday, the Israeli military said troops in the West Bank shot dead two Palestinians carrying pitchforks and an ax who tried to attack a soldier.

Another Palestinian died of a head wound from a clash with Israeli soldier the day before. His brother was killed in the same protest.

Also Sunday, the Israeli military said it would build a checkpoint on lands of the Palestinian West Bank village of Betunia to search vehicles before they cross onto a major highway that links Jerusalem and Tel Aviv.

Israel’s Supreme Court ordered the military to allow Palestinians to travel on parts of the road that were closed to them in 2002, after Palestinian militants shot at Israeli vehicles and killed several motorists.

UN Chief Says Israeli Settlements Must Be Stopped

UN chief says Israeli settlements must be stopped; Palestinian teen killed by Israelis troops

Associated Press
March 20, 2010

Visiting U.N. chief Ban Ki-moon said Saturday that Israeli settlement building anywhere on occupied land is illegal and must be stopped, while a Palestinian teenager was killed in clashes with Israeli troops elsewhere in the West Bank.

The death of 16-year-old Mohammed Qadus, who Palestinians say was shot in the chest by Israeli security forces, comes amid heightened tensions between Israelis and Palestinians after Israel announced plans last week for 1,600 new homes for Jews in disputed east Jerusalem.

The settlement announcement has sparked outrage and protests from Palestinians, as well as condemnation from Israel's closest ally — the United States — and the U.N. secretary general.

From a hilltop observation post on the outskirts of the Palestinian city of Ramallah, Ban got a closer look Saturday at some of the Israeli enclaves scattered across Palestinian-claimed territories.

The panorama included the sprawling West Bank settlement of Givat Zeev, home to 11,000 Israelis who live in rows of red-roofed houses, and Jewish neighborhoods in traditionally Arab east Jerusalem, the Israeli-annexed sector of the city that Palestinians claim as a future capital.

The brief geography lesson came a day after Ban, U.S. Secretary of State Hillary Rodham Clinton and other major Mideast mediators — known as the Quartet — met in Moscow to try to find a way to restart Israeli-Palestinian peace talks.

The mediators urged Israel to halt all settlement construction. Israel has agreed to curb settlement construction in the West Bank, but not in east Jerusalem, claiming the entire city as Israel's eternal capital.

On Saturday, Ban rejected Israel's distinction between east Jerusalem and the West Bank, noting that both are occupied lands.

"The world has condemned Israel's settlement plans in east Jerusalem," Ban told a news conference after his brief tour. "Let us be clear. All settlement activity is illegal anywhere in occupied territory and must be stopped."

The U.N. chief also expressed concern about what he said was a worsening humanitarian situation in blockaded Hamas-ruled Gaza.

Speaking later Saturday in Jerusalem alongside Israeli President Shimon Peres, Ban repeated the Quartet's call for a resumption of talks and for the establishment of a Palestinian state within two years.

Earlier this month, Israelis and Palestinians agreed to indirect talks, with U.S. envoy George Mitchell to shuttle between Palestinian President Mahmoud Abbas and Israeli Prime Minister Benjamin Netanyahu. However, the negotiations were put on hold after Israel announced its new settlement plans.

The announcement — which came during a visit by Vice President Joe Biden — prompted a major diplomatic row between Israel and the U.S., though Clinton suggested Friday that a way could be found to renew negotiations. Clinton has asked Netanyahu for specific gestures, including canceling the most recent housing plan, and is to hear from the Israeli leader in a meeting in Washington early next week.

Senior U.S. officials in Washington say Netanyahu apparently has put in writing the pledges he made to Clinton during their telephone conversation on Thursday.

The officials spoke on condition of anonymity to describe contents of a private diplomatic contact between Clinton and Netanyahu.

Clinton reportedly asked Israel to revoke its recent building decision, roll back on plans for new Jewish homes and make goodwill gestures such as releasing Palestinian prisoners and lifting some West Bank roadblocks.

Meanwhile, Mitchell is returning to the region over the weekend and is planning to brief Abbas on U.S. efforts. Abbas has said he will not negotiate with Israel directly unless it freezes all settlement construction, including in east Jerusalem.

Palestinians fear that expanding settlements will take up more and more of the land they want for their state.

Netanyahu has agreed to a 10-month curb in West Bank construction that ends in September, but the construction of some 3,000 homes in settlements, begun before Israel declared the partial freeze, is continuing.

Nearly half a million Israelis live on war-won land, including some 180,000 in east Jerusalem and nearly 300,000 in the West Bank.

Violent protests have erupted several times in the past week in east Jerusalem, where residents are angry over both the new Jewish housing plans and unsubstantiated rumors that Jewish extremists are plotting to take over an Old City shrine, holy to both Muslims and Jews.

The city was largely calm Saturday, although in a minor incident Palestinian youths lobbed some rocks at Israeli troops, who responded with tear gas and rubber bullet fire.

In the northern West Bank, a doctor at a Nablus hospital said Qadus died Saturday after being shot in the chest by Israeli security forces. Palestinians say a 17-year-old protester was also in serious condition after being shot in the head. The doctor spoke on condition of anonymity because he was not authorized to speak to the media.

Israel's military confirmed that it dispersed a group of masked, rock-throwing Palestinians near the town of Iraq Burin with tear gas and rubber bullets. It said the Palestinians were holding a violent, illegal riot and were approaching a nearby settlement in a threatening manner. The military insisted that its troops did not use live bullets and said it was investigating reports of the Palestinian death.

Clashes take place in the village on a near weekly basis over a water well that Palestinians claim Jewish settlers are trying to seize for their own use.

Israel Announces Plans for Additional Jewish Houses to be Built on Land Claimed by Palestians in East Jerusalem

Associated Press
March 18, 2010

Hoping to defuse a fight between friends, Israeli Prime Minister Benjamin Netanyahu and Secretary of State Hillary Rodham Clinton agreed Thursday to meet next week in Washington to confront an embarrassing dispute over Israeli land claims.

The Obama administration's special envoy for Mideast peace, George Mitchell, prepared to return to the region for talks with Israeli and Palestinian leaders.

Netanyahu called Clinton on Thursday. State Department spokesman P.J. Crowley declined to provide details of the conversation, which he described as the Israeli prime minister's response to Clinton's call last week in which she harshly criticized Israel's announcement of additional Jewish settlement housing in east Jerusalem.

"They discussed specific actions that might be taken to improve the atmosphere for progress toward peace," the department said in a statement released by Clinton's traveling party.

Crowley said U.S. officials will review Netanyahu's response and "continue our discussions with both sides to keep proximity talks moving forward."

Netanyahu's office said the prime minister clarified Israeli policy in the call with Clinton and suggested "mutual confidence-building measures" by Israel and the Palestinian Authority in the West Bank.

Netanyahu planned to be in Washington next week for the annual gathering of the premier pro-Israel lobby, the American Israel Public Affairs Committee. Clinton was scheduled to speak to the group on Monday.

Crowley said Mitchell will fly to the Mideast this weekend and hold separate talks with Netanyahu and Palestinian President Mahmoud Abbas.

The U.S. wants Israel to roll back plans for new Jewish houses on land claimed by the Palestinians. Crowley would not say whether Netanyahu offered to take that action in his call to Clinton.

Announcement of the housing plan embarrassed Vice President Joe Biden while he was visiting Israel last week and led to an unusual breach in diplomatic relations.

In public comments Thursday while in Moscow for talks on a range of international issues, Clinton appeared to be seeking to calm U.S. relations with Israel, saying the U.S. has not changed its approach to championing an Israeli-Palestinian peace process.

Last week Clinton denounced the Israeli housing announcement. The Israeli move was seen by the Obama administration as an insult and a repudiation of U.S. efforts to get Israel to halt construction of additional Jewish settlements.

"Our goals remain the same," Clinton said Thursday during a joint news conference with Russian Foreign Minister Sergey Lavrov. "It is to relaunch negotiations between the Israelis and the Palestinians on a path that will lead to a two-state solution. Nothing has happened that in any way affects our commitment to pursuing that."

German-French Alliance

UK Bank Chief Fears Paris, Berlin Will Push for Eurozone Political Union

EUObserver.com
March 12, 2010

As trouble surrounding the Greek economy escalated earlier this year, Britain's top banker warned the US that France and Germany will push for political union inside the eurozone currency club and that this could damage London's influence within the EU.

The thoughts of Bank of England Governor Mervyn King were relayed to Washington by US Ambassador Louis Susman after the two men talked in February of this year, as revealed by a leaked cable from whistleblower site WikiLeaks.

"Germany and France will ultimately have no choice but to offer explicit guarantees of Greek debt, argued King," according to the cable.

"The eurozone could not risk a Greek default and euro devaluation would not be an acceptable political option for Germany or France. Germany and France will likely, as a condition of any guarantee, require the ability to scrutinize if not exercise some control over the Greek budget. Longer-term, the drive for greater political cohesion will accelerate."

In May, Greece was handed a €110 billion EU-IMF bail-out.

At the same time, the EU's statistics agency, Eurostat, was given greater powers to scrutinize member state economic data, and the subsequent setting up of a €750 billion eurozone rescue mechanism, only days later, further increased the determination of European leaders to better co-ordinate their economic policies.

A decade after warnings about monetary union being unstable without a parallel political union to co-ordinate economic policies were ignored, EU leaders appear to be coming round to the idea.

French President Nicolas Sarkozy has put forward plans for a European "economic government," while European economy commissioner Olli Rehn has repeatedly said it is time to finally put the 'E' in Economic and Monetary Union (EMU).

Already in February, Mr King worried that this drive for eurozone consolidation could sideline Britain's influence inside the EU.

"The eurozone's move to greater political cohesion could poise some disadvantages for the UK, King speculated," reads the US ambassador's cable.

As an example, the central banker apparently pointed to a meeting of EU finance ministers earlier in February, during which "eurozone governments politely listened to chancellor [Alistair] Darling when he commented on the situation in Greece, but he was not invited to attend internal discussions since the UK is not part of the eurozone."

Mr King went on to warn:

"It would be incumbent for the UK to demonstrate that it has something meaningful to say and to be constructively engaged in the EU, should this greater political cohesion among the eurozone governments occur."

Separately, former French President Valéry Giscard d'Estaing has insisted that the eurozone is not in danger of breaking apart, arguing that it would be impossible for any state to leave and reclaim its former currency.

"It is impossible. Imagine a country decides to return to a national currency. Its citizens do not want. What could they do well with a currency devalued by 40 percent? There is no space for a small change," he told Le Parisien on Thursday

The World from Berlin: 'The Greek Crisis Induces a Sense of Deja Vu'

Spiegel Online
March 4, 2010

Greece's drastic steps toward slashing its national debt have brought workers into the streets. German commentators are divided over whether the measures will help the debt-stricken country avoid default, with the predatory nature of speculators reminding some of the 2008 financial crisis.

Greek Prime Minister George Papandreou was cheered by political and financial leaders in Europe on Wednesday for a new package of budget cuts -- amounting to €4.8 billion ($6.6 million) -- to control the government's soaring deficit.

The austerity measures, which include drastic cuts in bonus payments to civil servants (on top of frozen wages and slashed benefits from earlier measures), have led Greek unions to call for strikes. The severe cuts aim to slash the Greek budget deficit to 8.7 percent of GDP from the current 12.7 percent. Euro-zone rules say national deficits can't exceed 3 percent.

Workers have poured into Athens streets, and on Thursday morning about 200 demonstrators took over the Finance Ministry building, preventing some staff from going to work. But they didn't prevent the Finance Ministry from announcing a new 10-year bond issue later in the day -- a sign of optimism that Greece will manage to avoid bankruptcy.

Demand for the crucial bond issue was high. The €5 billion issue was massively over-subscribed, with total offers amounting to around €15 billion. Greece reportedly had to offer a rate of about 6.47 percent on the bond -- around 0.40 percentage points above the previous rate -- in order to attract buyers. The rate is twice that offered on comparable German bonds.

Papandreou is plainly still hoping for a bailout from his fellow EU governments. According to the Bloomberg news agency, Papandreou told his ministers Wednesday:

"We have fulfilled to the utmost all that we must from our side; now it's Europe's turn. It is a historic moment for the European Union."

Papandreou is due in Berlin on Friday for a meeting with German Chancellor Angela Merkel. Merkel tried to dampen possible Greek hopes of a German bailout when she told German TV on Wednesday that the new cuts in Greece send a welcome "signal" toward restoring confidence in the euro.

"I expressly want to say that Friday isn't about aid commitments," she said, "but about good relations between Germany and Greece."

German papers on Thursday have their own opinions.

The conservative daily Die Welt writes:

"It's more than symbolism for both the European Commission and the European Central Bank to support Greece's new budget cuts. Statements from politicians aren't worth much on financial markets; statements from central bankers are another matter. By taking such a step, the defenders of the euro are risking their most valuable asset, their credibility. Central bankers offer such praise only when they truly mean it."

"Chancellor Merkel will also welcome the cuts. Until now, she's been under pressure to make concrete offers of aid to Papandreou during his visit to Berlin on Friday. Now she can pat her guest on the shoulder, praise his willingness to make economic reforms, and make soft assurances that the euro zone will hold."

"Other governments in Europe have been testing the limits of responsibility with their budget deficits. So far there's no firm plan for the European Commission to deal with such delinquent governments in the future. How can Europe hold the euro zone together without broad agreement on fiscal and economic policies? At the same time, though, the people of Europe are hardly prepared to grant more power to Brussels. As long as these key issues remain unresolved, it will be hard to label German euro-skepticism as hysteria."

The left-leaning daily Die Tageszeitung argues:

"The Greeks have done just what the EU has demanded: They've introduced radical savings measures. But who profits? The euro, the Greeks, or neighboring Europeans? This drama could show that no one benefits at all; in fact everyone, perhaps, will suffer."

"In the Greek case, it's evident that radical savings during an economic crisis will just make the crisis worse. Workers who receive 7 percent less in salary will have 7 percent less to spend in the economy -- in restaurants or in businesses that may then have to lay off employees. (These budget measures) will steer Greece into a depression at record speed."

"The crisis in Greece can't possibly leave the rest of Europe indifferent, because the Greeks have not borrowed the money from themselves, but from banks in France or Germany. Those banks' loans will only get less, not more, secure if Greece plunges deeper into crisis. The new austerity measures, meant to calm financial markets, will in the long run just increase the unrest."

The business daily Handelsblatt, however, writes:

"Papandreou has scored a coup with these new austerity measures. Now the Greeks will be saved from bankruptcy and the markets will come to their side. Papandreou has gambled and now stands to win, because he's now receiving verbal and political support from every corner."

"If the situation with Greek government bonds can stabilize in the next few weeks -- which is expected -- then we will see the right environment for the issuance of a new Greek bond. The sheer size of the bond issue will in this case not play a decisive role. If the Greeks successfully place an issue of €3 billion - €5 billion with institutional investors, then the spell will be broken. What's important for the Greeks is to show clearly to the outside world that they again have access to international capital markets -- to say, 'We have the means to refinance our own debt.'"

"If trust in the Greek government returns among certain core investors, all other large investors will take notice. In spite of such a success, of course, interest payments would remain high. Greek bonds would be worth buying again."

The Financial Times Deutschland argues:

"Karl Marx famously said that important historical events happen the first time as a tragedy, the second time as a farce. It's remarkable how financial markets these days are proving the prophet right. The Greek debt crisis certainly induces a sense of deja vu."

"The bank bailouts from the first year of the global financial crisis are lodged firmly in the minds of bankers and fund managers. Many big market players are currently betting on the bailout reflexes stemming from those first months of panic. People in banking circles have been saying for weeks that the euro zone would never let one of its poor relations default."

"It should come as no surprise that the markets would test the limits of EU governments. Investors want to know for certain if Germany, in the end, will always come to the rescue of Greece and other member states holding enormous domestic and foreign debts. So interest rates on Greek bonds have continued to rise to levels that even many bankers think are too high."

"If the governments in Paris and Berlin over the next few days step in with aid, the farce will be perfect: a bailout as promised, with uncertain results. Every new bond issue in southern Europe could bring a new emergency, and no one knows when the markets will be satisfied. Will €4 billion or €17 billion be enough? Or should Germans maybe set aside €40 billion to rescue Greece? Debt managers in Athens will have to borrow at least that amount this year."