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The Greek Austerity Message

Authors: Robert McMahon, Editor, and Roya Wolverson
March 3, 2010

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The Greek government's March 3 announcement of another round of shock therapy (FT) is intended to signal that Athens is prepared to attack a sovereign debt problem that has roiled the European Union as well as global financial markets. The measures, which are expected to yield about $6.5 billion in savings, amount to the equivalent of 2 percent of gross domestic product. That puts Greece on the way to meeting a promise to cut its massive budget deficit to 8.7 percent of GDP this year from the 12.7 percent in 2009. It followed sharp warnings from EU officials wary of offering Greece a publicly unpopular bailout without signs that the country was taking appropriate belt-tightening moves. EU Economy Minister Olli Rehn said earlier in the week (EUObserver): "Either you keep your debt under control or your debt starts controlling you."

Greece's financial problems, which Prime Minister George Papandreou this week called "catastrophic," are seen as threatening the zone of Europe's single currency, the euro. Ireland, one of the so-called PIIGS countries that have wracked up sovereign debt troubles, has embarked on its own tough spending cuts without EU aid, and the hope is Greece will follow that model. In one initial reaction, the euro stabilized on news of the Greek package (Reuters). But markets are waiting for an important meeting between Greek and German leaders Friday about implied financial support and the expected sale of ten-year Greek government bonds.

At stake is not just the solvency of Greece's government but the deal struck when the euro became the EU's single currency more than a decade ago. In the case of fiscal powerhouse Germany, writes the Economist, the bargain was that "the single currency's members would never jeopardise its stability nor ask Germans to pay for anyone else's mismanagement." But instead, "many of Europe's weaker economies failed to reform and Germany accumulated gratifyingly large current-account surpluses." In fact, reports the Wall Street Journal, the Greek government regularly failed to meet rules requiring euro countries to limit annual budget deficits to 3 percent of GDP, and other European governments long ignored this. The effects of Wall Street swap transactions, cited in Europe as a major culprit in the Greece debt crisis, pale in comparison to Greece's own misguided budget moves, the paper reported.

Next steps include discussions of more coordinated "economic government" (Economist) within the eurozone. There is also talk of a European fund, patterned after the International Monetary Fund, to step in for future bailouts. Germany's Spiegel magazine says European Central Bank President Jean-Claude Trichet could soon face the prospect of buying up the debt of countries that risk bankruptcy. But the magazine says, "Such a bailout would come at a high price: It would turn the European monetary union into an inflation union."

Additional Analysis:

PIMCO's Bill Gross questions whether a debt crisis like Greece's can be cured by government bailouts, which imply more debt.

Merk Investment's Axel Merk says despite money managers calling for a Greek bailout, there are risk-friendly investors willing to extend loans to Greece. 

In this interview, CFR's Sebastian Mallaby says the markets' reaction to the sovereign debt crisis in Greece and other European countries suggests global governments "have used up all their ammunition to boost global growth."

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