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Published: Sunday, 6/17/2012

Europeans pull money out of banks

Withdrawals aggravate euro zone's problems

BLADE NEWS SERVICES

ATHENS -- As Greek voters go to the polls today for a pivotal election that will affect economies throughout Europe and beyond, residents in the continent's most financially distressed countries have been taking their money out of banks to protect their savings.

They are worried that their savings could be devalued if their countries stop using the euro, or that banks are on the verge of collapse and that governments cannot make good on deposit insurance.

So in Greece, Spain, and other countries they are withdrawing euros by the billions -- magnifying their countries' financial problems.

The money is being hoarded at home or deposited in banks in more stable economies.

If the withdrawals turn into a full bank run after today's election in Greece, they could hasten financial disaster in Europe and help spread turmoil around the world.

In Greece, even if the establishment center-right party New Democracy ekes out a victory in a race that polls show as tight, the country faces weeks or months of negotiations with European lenders over the terms of its austerity program.

All parties agree they are too onerous to enforce on its rapidly shrinking economy.

A victory by Greece's leftist party Syriza promises a more serious confrontation over how -- and perhaps whether -- to keep Greece in the euro zone.

If, as in the May elections, there is no clear winner, Greek political leaders have said they are committed to forming a government no matter what.

In any event, the new government will have to open new talks with the big European powers and press for a more generous bailout.

Leaders of the G-20 group of developed and emerging economies are to gather Monday in Mexico, where they are expected to debate ways to keep the Greek crisis and the weakness of the bigger economies of Spain and Italy from undermining the euro and dragging the global economy into a new recession.

Central bankers from Tokyo to Washington have pledged to intervene in financial markets if necessary to shore up those economies.

With so much at stake, the head of the European Central Bank and other euro zone leaders worked Saturday on a grand vision for the euro zone meant to reassure investors and allies that flaws in the currency union will be addressed quickly.

The plan will include measures to prevent bank runs and reduce what has become a vicious circle of government debt problems turning into banking crises, as has happened in the past two years.

In addition, the plan will push for countries to remove the regulations and layers of bureaucracy that inhibit competition, keep young people out of the work force, or make it difficult to start a business.

The goal would be to make the euro zone less vulnerable to crises and better able to grow its way out of a debt crisis.

But it is unclear whether more pledges to reform will calm financial markets.

Mario Draghi, president of the central bank and one of the authors of the plan, said Friday that it would be unveiled within days, ahead of a meeting of European leaders at the end of June.

Under the plan, euro zone leaders will seek to establish the central bank as supreme bank regulator with broad powers, in place of the relatively toothless European Banking Authority.

Countries would also create a deposit insurance program to augment national programs.

The goal would be to reassure ordinary depositors and prevent bank runs, an imminent danger in Spain as well as Greece.

Mr. Draghi is unlikely to soften the central bank's insistence that euro zone countries continue to pursue budgetary austerity even as their economies sputter.

But the plan may call for governments to go about belt-tightening differently.

Instead of slashing transportation projects or other infrastructure, for example, leaders would be pressed to cut operating expenditures.

On Saturday, Benoit Coeure, a member of the European Central Bank's executive board, underlined Mr. Draghi's comments, saying that Europe needs unified banking regulation to replace the hodgepodge of national regulators and deposit insurance programs that now exist.

The euro zone has no shortage of plans, pacts, and treaties intended to end years of sluggish growth and impose discipline on its 17 members.

The challenge for Mr. Draghi and the plan's authors will be to package their plan in a way that makes investors believe that something will finally get done.

"There is a long-standing agenda on growth," Mr. Draghi told a gathering of economists Friday in Germany. "It is time to implement it."



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