As European leaders move toward a second bailout for Greece, some economists are warning that a new rescue would merely kick the country’s problems further down the road and might not avert a default that could strain Europe’s monetary union.
A year after providing an aid package of ¤110 billion, or $161 billion at current exchange rates, officials are considering whether to lend Greece an additional ¤50 billion or ¤60 billion as the country struggles with a deep economic downturn.
Even if Greece is pulled from immediate danger again, economists say, European leaders face the prospect of providing still more aid over the next several years if Greece cannot revive its economy.
“I don’t see how Greece can eventually avoid some kind of default,” said Martin N Baily, a senior fellow at the Brookings Institution, who served as chairman of Council of Economic Advisers under the Clinton administration. “It’s hard to see how you can avoid the need to finance this over the next five to 10 years.”
His sentiment was echoed widely among economists, politicians and analysts gathered here over the weekend for a conference held by the Council for the United States and Italy.
Greece’s problems are deepening at a time when the United States is also trying to pare its own gaping budget deficit, a challenge that has grown amid signs that the American economic recovery may be faltering.
Indeed, ever since the European debt crisis flared, European policy makers have wondered aloud whether the United States might face its own day of reckoning. Last week, Moody’s Investors Service said it might downgrade the United States government’s top-tier credit rating if Congress failed to raise the nation’s debt ceiling in coming weeks.
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The Greek government is trying to cut its deficit by ¤6.4 billion by reducing spending and raising taxes, as well as by selling major national assets. Without those pledges, the International Monetary Fund (IMF) was wary of releasing a new portion of aid promised in its first loan a year ago, and European leaders were loath to come up with new financing. The Greek fiscal crisis worsened after Moody’s warned last week that there was a 50 per cent chance that the country would default or restructure its debts within the next five years.
European leaders want to avoid such an event at all costs. The European Central Bank (ECB) has warned that a default or restructuring by Greece could cause a panic about the ability of Ireland and Portugal — which have also received European bailouts — to repay their debts. The result, some say, could be a financial contagion that engulfs other weak euro zone countries, some large European banks and even the European Central Bank, which holds large amounts of Greek debt.
Some officials say such warnings are too dire. But many economists say they see any further trouble in Greece as both a political and economic flash point for the rest of the euro zone. The inability of heavily indebted countries to stoke their economies could broaden an economic divide between Germany and weaker nations like Ireland, Portugal and Spain.
“Europe is continuing to diverge,” said Alessandro Profumo, a former chief executive of UniCredit, one of the largest banks in Italy, and a member of the board at Bocconi University in Milan. “This cannot continue.”
That could leave countries like Germany and France financing hefty new portions of aid for weaker countries for some time to come, a situation that would present fresh political challenges, economists said.
“What we can’t afford is a transfer union” in which taxpayers from strong countries continue to foot part of the bailout bill for weaker ones, said Roland Berger, the founder of Roland Berger Strategy Consultants and a former adviser to German national and state governments. “The European population is simply not ready for it.”
Chancellor Angela Merkel of Germany, who exerts considerable sway in talks over assistance for Greece and other countries, might have difficulty explaining to voters why Greece should receive more help, even though Germany has benefited greatly from being part of the monetary union. And in France, Berger said, economic concerns are among the issues that have helped bolster the campaign of a right-wing candidate, Marine Le Pen of the National Front party.
©2011 The New York
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