Greece is closer to default than previously thought, calling into question whether a second planned bailout will be enough to contain the European debt crisis – and thus avoid plunging the world into another global recession.
As finance ministers from the eurozone meet today in Luxembourg to address the debt crisis, Greece revealed that it is in even more dire straits than envisioned when international powers agreed to a €110 billion ($146 billion) bailout deal this summer.
Based on a draft budget sent to parliament today, Greece's deficit this year will be 8.5 percent of gross domestic product (GDP), well above the 7.6 percent outlined in the bailout deal. The higher deficit was chalked up to a deeper recession than forecast, which is projected to bring public debt to a whopping 172.7 percent of GDP by next year – the worst ratio in the eurozone.
Greece needs an €8 billion tranche from the €110 billion deal by mid-October to avoid bankruptcy, but that dispersal is not expected to be decided upon until an Oct. 13 meeting.
In addition to the Greek bailout, eurozone leaders are also pushing to expand a more general €440 billion rescue fund to €780 billion – a move that received key backing from the German parliament last week. But even before today's gloomy news, experts cautioned that both the bailout and the rescue fund were no more than temporary solutions.
“What we are doing right now is buying time,” said Ferdinand Fichtner of the German Institute for Economic Research in Berlin. “Expanding the euro rescue fund, releasing more bailout money to Greece – all that buys time. But in the end there will have to be a ‘haircut,’ ” said Mr. Fichtner, referring to writing off a portion of the debt. “It’s the only solution for Greece.”
A Greek raised in Germany
Alexa Stavrakakis may not be an economist, but she has a unique view of the European debt crisis that is testing Germany’s will to keep poorer nations like Greece afloat.
Born and raised in Berlin by her Greek parents, who came here more than 25 years ago, she now studies politics and helps her father in his Greek restaurant on weekends.
“I’m stuck in the middle. I have a German mind and a Greek temperament,” she says. “I can see why Germans don’t want their money to disappear in rescue funds. I’m just back from Greece, and the infrastructure there is terrible: the streets full of potholes, the airport a mess. I don’t want my taxes used to pay for this.”
But when her Greek relatives argue that Germany never paid reparations for the extensive damages inflicted during World War II and that now is the time to make up for that, Ms. Stavrakakis can sympathize. “In two years’ time, my parents want to retire to Greece. I’m worried – how can they go back if the country is in such a state?”
As Europe comes under increasing international pressure to contain the debt crisis, Germany and Greece represent two opposite poles of a continent in turmoil.
How their leaders resolve the conflicting constraints placed on them could reshape the eurozone – and determine whether it is robust enough to avoid a collapse that could pull the world into another global recession.
“We are in a precarious situation. We face a confluence of sovereign debt and banking risks, with the epicenter of that being in the euro area,” said Tharman Shanmugaratnam, Singapore’s finance minister, after a Sept. 24 meeting he chaired on global recovery at the International Monetary Fund (IMF) in Washington. “[N]o one is going to be immune from problems in any one part of the world, and problems in the euro area in particular are problems that will affect all of us. It is not a decoupled world.”
Is buying time the only solution?
The reforms under way in Greece were impressive, she said. “The most important thing now is for Greece to regain the confidence of the international community. The eurozone as a whole needs to stop being a union of debt and turn into a union of stability.”
But global markets aren’t confident in the ability of wealthier countries like Germany to continue rescuing their struggling neighbors, particularly with rising public opposition to paying for other nations’ troubles.
Grand plan: €2 trillion rescue fund
Recently elected IMF Chairman Christine Lagarde of France has proposed an even grander plan: a €2 trillion ($2.7 trillion) rescue fund that could act as a giant safety net for any European economy in trouble. Such a large fund, she argues, would shore up investor confidence and thus guard both Europe and the world against future debt crises.
On Sept. 29, the German parliament took a step in that direction by voting in favor of an expanded bailout fund. It will have a guaranteed sum of €780 billion, up from €440 billion in the current fund. It will also have a wider area of authority, being able to buy bonds not just in the secondary market, but also from governments directly. It can also lend money to recapitalize banks.
“This is certainly a victory for [Mrs. Merkel],” says Berlin stock exchange chief Arthur Fischer, “It is a key vote, but it is one of many.... She’s not out of the woods yet.” The German parliament has reserved the right to veto any future bailouts, reflecting growing reluctance among the public – as well as some politicians and economists.
“All the bailout funds so far have done nothing to solve the crisis,” says Frank Schäffler, a member of parliament for Germany’s Free Democrats, the junior partner in Merkel’s governing coalition. “On the contrary, they ... [are] making things worse. No bailout will save a country like Greece. It’s throwing good money after bad.”
Though Mr. Schäffler represents a very small minority in parliament, he has a large part of the German electorate behind him.
In a recent survey by the Forsa polling institute, 80 percent of Germans said they would not be prepared to make a personal contribution to help the Greek economy. More than 1 in 3 thought Greece should be kicked out of the eurozone.
“I know people are concerned – scared, even,” says Ursula von der Leyen, Merkel’s labor minister. “But if you ask them, ‘Do you want the deutschemark back, or do you want to keep the euro?’ the overwhelming majority will say they want the euro. They want more Europe, not less.”
An alternative to bailing out Greece
Hans-Olaf Henkel, an economist and professor at the University of Mannheim in Schloss, Germany, disagrees: “The German people are constantly misled,” says Professor Henkel, who formerly headed the mighty German Industry Association. “They are told there is no alternative to saving Greece. Well, there is.”
In Henkel’s view, there are at least two other scenarios. One is to let Greece go, even if there is no framework for leaving the 17-country eurozone. But the plan he favors is much more radical. Germany, Austria, the Netherlands, and Finland – all financially sound – should remain part of the 27-member European Union but leave the eurozone and form their own currency.
“I don’t blame Mrs. Merkel,” Henkel says. “There is no textbook for this situation; she’s in uncharted waters. But she’s leading us onto the slippery path of a transfer union, where everybody is responsible for everyone else’s debts. Or, in other words, nobody is responsible.”
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