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Alarming deficits
By Paul Harrington

THE swelling public deficits in Portugal, Spain and Greece have plunged the eurozone into the biggest crisis in its 11-year life, presaging years of belt-tightening, analysts warn. It is a vicious financial circle; the more fears over deficits and debts grow, the harder it becomes for the troubled eurozone nations to borrow money to stay afloat. With 16 EU nations now using the euro the problems are resonating throughout bloc. The euro fell below $1.36 on Friday, its lowest level in over eight months.

One risk is the “free loader” effect, said Patrick Artus, leading economist with Natixis. That happens when other countries are forced to come to the aid of an ailing eurozone member “to avoid a default risk that would be very dangerous for the euro zone as a whole.” On the other hand if financial markets are not convinced that countries facing problems will be bailed out there will be a rise in risk premiums or worse.

National governments are doing all they can to keep the financial vultures at bay. Spain and Portugal are particularly keen not to be tarred with the same brush as Greece, which has debts over 294 billion euros ($412 billion) and a 12.7-per cent deficit, far beyond EU limits of three percent of output for eurozone members. But the investors are jittery.

The Ibex-35 index of most traded Spanish stocks closed down 1.35 per cent on Friday amid growing concerns over the state of the economy. Investors have no “objective” reason to worry about the state of Spanish public finances, Spain’s secretary of state for the economy Jose Manuel Campa assured. Portuguese Finance Minister Fernando Teixeira dos Santos insisted that his country had “nothing to do with Greece”. Eurozone officials have also rushed to reinforce the assurances about the countries of southern Europe which are in the fiscal spotlight, nicknamed “Club Med” by Germany.

The European Union last week approved Greek efforts to tame its debt crisis but placed Athens under unprecedented economic scrutiny. While there seems very little possibility that Greece will be forced out of the euro, a move acceptable neither politically or economically, the underlining question persists: Can the monetary union ride out the storm? The eurozone is “undergoing its first real test”, since its birth on January 1, 1999, according to US economist Nouriel Roubini.

Economists at the Royal Bank of Scotland warn that the situation is such that mere words are not enough. That leaves Greece’s European partners under pressure to come up with some kind of financial aid mechanism for Athens, perhaps via bilateral loans, a solution which would be politically less humiliating than a eurozone country going cap in hand to the International Monetary Fund.