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Greece bailout: What's the future of the euro?

The Greece bailout package agreed to by European leaders and the International Monetary Fund last week decreases the likelihood of a Greek government default. But the wrangling over the bailout -- and the steps that left Greece in a financial hole -- raise questions about the prospects for the stability of the euro.

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Some experts believe that Germany has been looking for a way of kicking states such as Greece and Spain out of the 16-member euro club to create a new bloc more in tune with the values of the old deutsche mark.

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Capturing the German mood, Chancellor Merkel said, “countries which cheat in their public finances should help themselves,” in an interview carried by Der Spiegel.

How much danger is there of ‘contagion’ from Greece spreading elsewhere in Europe?

Much hinges on how Greece weathers the next few weeks, but the biggest worry is over the other debt-laden “PIIGS,” an acronym that includes Portugal, Italy, Ireland, and Spain.

Their circumstances vary. Stringent austerity measures unveiled by Ireland have convinced many economists about its prospects for returning to growth, despite concerns that spending cuts and tax hikes will suck demand out of the economy and prolong Ireland’s slump.

The eurozone’s fourth-largest economy, Spain, is another matter. Spanish unemployment is more than 20 percent, and the government deficit is around 9 percent of GDP. Spain is expected to take on more debt with bond issues.

“Spain is going to pose a big problem. It is in all sorts of trouble about how it will increase growth. It lost a great deal of competitiveness, and costs have gone up,” says Simon Tilford, an economist at the Centre for European Reform, a think tank in London. “Any economy regarded as having poor growth prospects is going to struggle to borrow at affordable levels.”

Economists fear a Greek-style crisis in Spain would have a more devastating impact on the euro, while it remains unclear if other states would step in to help.

What are likely to be the long-term consequences of the crisis?

Some predict a growing clamor – particularly from Paris and Berlin – for more mutual scrutiny of member states’ budgets and perhaps more oversight by the European Commission, the EU’s executive entity. That would further alienate “euroskeptic” opponents of deeper European integration, such as British Conservatives hoping to take over the reins in Britain, currently one of 11 EU states that have not adopted the euro.

Inevitably, voices warning that the breakup of the euro is over the horizon are growing louder.

Also gaining ground in some quarters is the case for the creation of a new currency bloc with Germany at its core and strong, mainly northern states, floating around it.

“This would restore balance in the [European Monetary Union, or eurozone], but with pretty disastrous consequences for citizens of the southern European countries, since they are likely to go through massive devaluations first and then have to sort out fiscal policy anyway,” said Robert Hancké, a monetary union and European expert at the London School of Economics. “In addition, financial markets are likely to pick off weak countries during that process.”