The euro crisis is far from over. The Greek economic meltdown threatens to bring down the entire 16-nation monetary union. Last week, the rating agency Standard & Poor’s downgraded Greek bonds to “junk.” Contagion has already spread to Portugal and Spain, whose bonds were also downgraded by international rating agencies.
Markets are reacting with skepticism to the largest bailout ever - an attempt to prevent the bankruptcy of Greece. Former Eastern Bloc countries, such as Slovakia, are now expected to bail out Greece. On Sunday, the IMF and the 15 other Eurozone countries - the member states of the European Union (EU) which, together with Greece, use the euro as their common currency - agreed to bail out Athens with bilateral loans totaling â?¬120bn ($160bn) over the next three years. Many of these 15 countries, however, have huge debts themselves. They have agreed to help Greece, hoping that someone (read: Germany) will come to their rescue, too. Will Berlin and the IMF be able to save them all?
Polls show that between 66% and 86% of the Germans are opposed to bailing out the Greeks. Nevertheless the German government says there is a “good chance” of getting the Bundestag to agree to the bailout by Friday. Germany has to pay â?¬22bn of the â?¬120bn - the largest share apart from the IMF, which pays â?¬40bn. Nevertheless, 76% of the Germans expect that Greece will not be able to pay back the loans it receives. The German political establishment, however, feels it has no other choice but to come to the rescue of the Greeks. “It is about recognizing our national responsibility within Europe,” German Finance Minister Wolfgang SchÃ¤uble said.
German Chancellor Angela Merkel long resisted the plans to bail out the Greeks. Last week she changed her mind. One of the people who rang her to ask her to bail out Greece was U.S. President Barack Obama. Merkel insists, however, that the Greeks implement harsh measures, “not just for one year but for several years.” Merkel said on German television that due to the bailout she would not be able to keep her election promise of a tax relief.
In exchange for the bailout, Greece must introduce draconian austerity measures. The IMF and the EU demand â?¬22bn in new budget cuts over three years -- on top of cuts already announced. Greece will raise its retirement age from 62 to 67 years; salaries and pensions in the public sector will be frozen; annual holiday bonuses will be capped and scrapped for higher earner; the VAT will rise from 21% to 23%, and there will be a 10% hike in fuel, alcohol and tobacco taxes. The German weekly Der Spiegel writes that the IMF expects to have to remain in Greece for ten years until the economic reforms have been realized and successfully implemented.
The Greeks trade unions, however, reject the austerity plan. A general strike hits the country today and tomorrow. On Greece’s recent Labor Day, there was severe rioting. Anarchists threw petrol bombs, attacked banks, shops and hotels, and clashed with riot police outside the Finance Ministry in Athens; meanwhile thousands of Greeks, mobilized by the trade unions and left-wing parties, demonstrated against the austerity plans of the government. Polls suggest that more than 50% of the Greeks are prepared to take to the streets to stop the government plans.
Greek Prime Minister George Papandreou has nevertheless promised the IMF and the EU that the cuts will be implemented.
The markets, however, are not impressed. In early February, Papandreou promised similar austerity measures but did not live up to his promises. Earlier this week, French Foreign Minister Bernard Kouchner warned that there are no guarantees that the massive bailout for Greece will prevent the consequences of it from spreading to the other countries of the eurozone.
The government of Slovakia, a country expected to contribute $1bn to the Greek rescue plan, announced it will not immediately contribute its share. “I don’t trust the Greeks. The approval [of the austerity plan] by the [Greek] government is not enough. We want to see laws approved by the parliament leading to cuts in salaries, pensions and social benefits. Until then the Slovak cabinet will not authorize its loan,” said the Slovak Prime Minister, Robert Fico. The Austrian Finance Minister, Joseph PrÃ¶ll, warned that Europe is “losing patience” with Greece. “When we watch the protests,” he said,” our patience, mine and the rest of Europe’s, is almost at its limit.”
Spain, meanwhile, is trying to convince the markets that it will be able to solve its budgetary problem independently. “Spain is able to pay its debts. We will not need help,” said Elena Salgado, the Spanish Minister of Economics, last week, trying to assure markets that Spain would cut its deficit from 11.4% to 3% by 2013.
The general expectation is that if the Greek and Portuguese dominos fall, Spain will follow. The irony of the situation is that Portugal is expected to contribute about â?¬2bn of the â?¬120bn in bilateral loans to Greece, and Spain some â?¬8bn. Italy and Ireland, who are also burdened with debts, are to contribute some â?¬12bn and over â?¬1bn respectively. In other words: The insolvent are expected to bail out the bankrupt.
It is clear that the latter is impossible. The euro is doomed. In the Netherlands, opposition leader Geert Wilders advocates the reintroduction of the Dutch guilder. “If Greece reintroduced the drachma,” argued the German tabloid, Bild.” that would be the best possible thing that could happen to our euro.” This was also the opinion of Bill Emmott in the British newspaper, The Times, who wrote that Northern Europeans should “accept the need to exclude Greece from the euro.” Mats Persson of the British think tank Open Europe said that “an alternative would be for the eurozone to split into a German-led inner-core and an outer-core made up of a weaker group of countries, which would not include Greece.”