The European Central Bank met overnight under its new head, Mario Draghi, for the first time and cut interest rates to try and shore up the European economy as it stumbles towards a slowdown.
The bank cut its key rate by 0.25% to 1.25% as the new head warned that Europe was expected to be in a "mild recession" by the end of this year.
At the same time the Greek Government called off the referendum idea of Prime Minister Papandreou, but the economic policy paralysis in his home country threatens to pitch Rome into the storm.
Italian debt hit a new high of 6.339%, Mr Berlusconi could not get agreement on policy changes to convince the G20 and other European leaders that he remained in charge, and there was speculation that it Government was on the brink of failure.
Despite more buying of Italian and Spanish debt, Mr Drahgi offered no commitment to scale up the central bank’s bond-buying program that has kept Italy and Spain alive and in the markets.
"What we are observing now is … slow growth heading toward a mild recession by year-end," Draghi told a news conference. "A significant downward revision to forecasts and projections for average real GDP growth in 2012 (are) very likely," he said.
The rate cut, and then his comments helped US and European sharemarkets reverse earlier falls on the growing uncertainty about Greece.
The ECB’s meeting came a day after the US Federal Reserve cut its growth forecasts for the next three years, but lifted its estimates of unemployment in something of a surprise.
That was despite a slightly more upbeat commentary about current economic conditions in the post meeting statement.
But the Fed chairman, Ben Bernanke singled out the European crisis as one of the factors hitting the American economy.
From inside the eurozone, the crisis is the only issue that matters and it has to be said that cutting interest rates won’t help the EU or eurozone economies while uncertainty continues about Greece and the latest bailout proposal.
It pushed markets lower overnight as G20 leaders met in Cannes, France and discussed the latest developments in the crisis.
EU leaders warned that Greece won’t get the 8 billion euros of aid from the existing bailout until there was a ‘yes’ vote in the now abandoned poll.
With the country needing to find $US12 billion to meet a bond payment on December 11, the threat to withhold the money was dramatic.
Almost as dramatic was the rate cut, which surprised many in Europe because of the continuing high level of inflation which is running at 3%, according to the preliminary figure for October, well above the ECB’s preferred 2% ceiling.
For that reason a rate cut was not widely tipped in Europe.
But it’s clear that the combination of the two rate rises this year, the Greek crisis, the impact of spending cuts in many EU countries, plus the slowdowns in the US and Chinese economies, has pushed Europe into another slump.
The Organisation For Economic Co-Operation and Development warned this week that leading economies are slowing with the eurozone set to shrink briefly, and called for rapid action by European leaders to enact promised crisis measures.
"In the advanced G20 economies, interest rates should remain on hold or, where possible, be reduced, notably in the euro area," said the Paris-based OECD.
OECD head Angel Gurria said that the economic outlook "would be gloomier if the commitments made by EU Leaders fail to restore confidence and a disorderly sovereign debt situation were to occur in the euro area with contagion to other countries, and/or if fiscal policy turned out to be excessively tight in the United States.
"OECD analysis suggests that a deterioration of financial conditions of the magnitude observed during the global crisis (between the latter half of 2007 and the first quarter of 2009) could lead to a drop in the level of GDP in some of the major OECD economies of up to 5% by the first half of 2013," she said.
While the dramas around the Greek referendum dominate thinking, the life blood of the European economies, manufacturing, is decidedly in a contraction phase, with a big fall in Germany leading the way.
The final Markit Eurozone Manufacturing Purchasing Managers Index (PMI) for October, which measures changes in activity levels across thousands of eurozone manufacturers, fell to 47.1, revised down from a preliminary reading of 47.3 and down from 48.5 in September.
It was the third consecutive month the manufacturing PMI has been below the 50 level that divides contraction from growth.
Output and new orders indexes plunged to levels not seen since mid-2009 as the continent struggled out of the GFC.
The survey suggests the continuing crisis is choking confidence in euro area business.
And with the news that German unemployment unexpectedly rose for the first time in nearly two years to 7%, it adds pressure on the ECB to cut interest rates.
On top of this slowdown, manufacturing in other parts of the world is also slowing, or running sluggishly.
Factory growth in the US, measured by the Institute for Supply Management (ISM) index, unexpectedly slowed in October, in line with similar trends in China (in one survey), Britain and Canada.
Separately, Eurostat reported that unemployment in the region rose to 10.2% in September from 10.1% in August. Economists had fore
