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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. |
