Greek Turmoil Raises Fears on Instability Around Europe

Athens – The instability rocking Greece this week is the latest manifestation of a troubling new phase in the global financial crisis: political turmoil is sweeping through Europe, toppling governments and threatening to undermine efforts to rescue the financial system and, ultimately, the euro zone itself.

It seems likely that Prime Minister George Papandreou of Greece will manage to hold his government together long enough to push through the deep cuts required for his debt-ridden country to receive its next installment of international aid. He reshuffled his cabinet on Friday, replacing Finance Minister George Papaconstantinou with veteran Socialist Evangelos Venizelos as part of a broader cabinet reshuffle aimed at restoring waning confidence among Greeks and foreign creditors.

But with a rising tide of voter anger against bank bailouts, budget cuts and austerity measures, his popularity is plummeting. And it is not just Mr. Papandreou who is feeling the public’s wrath.

Across Europe, people are complaining that they are unfairly paying the price for the mistakes of their governments while they are growing increasingly resentful of the international banks and the preferential treatment they seem to receive. And they are getting louder.

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“They took everything, and we have to pay,” said Katerina Fatourou, 30, an elementary school music teacher in Athens, summing up a common sentiment here after a large and sometimes violent general strike. It is not likely to be the last in Europe this summer.

In a vicious cycle, the rising political turmoil is sowing unrest in global financial markets, raising the interest rates paid by heavily indebted nations in Europe to ever higher levels and threatening their solvency.

European officials are also worried that if Greece’s politicians bow to popular anger and reject the austerity route, other countries might follow, with potentially dire consequences for Europe’s banks and the common currency. So concerned were European Union officials about the potential for trouble that the bloc’s top financial official, Olli Rehn, hinted in Brussels on Thursday that Greece might get the new financial aid even if European finance ministers failed to approve the loan at a meeting this weekend.

In recent months, the governments of Ireland and Portugal have been ousted over efforts to cut budgets and benefits. Students have rioted to protest tuition increases in Britain, and young people who feel shut out of their own futures have held nationwide sit-ins in Spain, where the governing Socialists are in trouble in the polls. Right-wing political parties are gaining strength, tapping, in part, the populist rejection of austerity plans.

This week, Mr. Papandreou became the latest politician pulled in opposite directions by the markets, which hang on his every word, and his country’s citizens, who have already been stung by one round of wage and pension cuts and are resisting new spending reductions and tax increases. But he needs those measures to persuade the International Monetary Fund to release the next installment of a $155 billion bailout package negotiated a year ago.

“It’s hard enough to get the electorate to support austerity at the best of times,” said Simon Tilford, the chief economist of the Center for European Reform in London. “They promised endless austerity with no prospects of a return to growth, and there will be mounting opposition to this.”

In Athens this week, the pessimism was as thick in the air as the tear gas that the police sprayed during Wednesday’s demonstration.

“A year ago it was bad, but not like now,” said Irene Anastasiou, 22, a quiet marketing student who has been taking part in a peaceful sit-in in Athens’s central Syntagma Square for the past three weeks. “I am a young Greek girl. I have dreams, and they destroyed them,” she said of the government.

In Greece, “clearly there is a sense that this society is reaching the breaking point,” said Jens Bastian, an economist at the Hellenic Foundation for European and Foreign Policy in Athens. People are asking: “ ‘Where is this going to lead? Why are we making these cuts? Why do I have to accept that I have less income? What’s the larger purpose of this?’ ”

But those questions are not being asked only in Greece. Across Europe, politicians have failed to sell skeptical electorates on a variety of austerity measures.

Earlier this month, Portugal’s center-right Social Democratic Party unseated the governing Socialists, as voters punished José Sócrates, the Socialist caretaker prime minister, for his failure to get public finances under control and help reverse a slump in the economy that has pushed the unemployment rate above 12 percent.

Instead, Portugal was forced to negotiate a $110 billion international bailout in return for pledging more austerity measures, even as analysts forecast that its economy will contract by 2 percent this year and next. Mr. Sócrates resigned in March because of parliamentary opposition to his austerity plan.

In Greece, the center-right opposition is also opposed to the terms of the bailout and is instead calling for tax breaks — a strategy that experts said would make the deficit rise sharply and lead to further turmoil.

More and more experts are questioning the wisdom of budget cutting because countries like Greece and Portugal are already caught in what they call a “debt trap.” Further cuts, they say, will only depress the economy, reducing tax revenues and making it harder to repay the debt.

“The E.U. and I.M.F. are insisting on a course of action that has already failed,” Mr. Tilford said. “That is not going work but is going to impose huge economic and social costs.”

Voters are increasingly sending politicians the same message. In Ireland in February, the governing party, Fianna Fail, which had run the government for 14 years, suffered its worst showing in its more than 80-year history and was kicked out of power.

In Britain, retail sales were down 1.4. percent in May, which was taken as a sign that consumers have no faith in the Conservative government’s economic plan, while the opposition called for an emergency cut in the value added tax to increase spending.

British labor unions representing about two million employees say they plan to hold coordinated strikes on June 30, upset at layoffs, pay freezes and changes to the pension system. They have prompted talk of a “summer of discontent” with echoes of the 1970s, when the country was crippled by general strikes.

Back in Athens, many Greeks said the government, not the people, should be held accountable for the country’s problems, raising an ancient question.

“Could we and should we trust the people?” asked Konstantinos Poulis, a playwright and actor who attended Wednesday’s demonstration. “Or should it be someone who knows better? Even if Plato were governing the country, and not Papandreou, the problem would be the same.”