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The Eurozone at the Brink

By Mitch Yoshida, Mayme and Herb Frank Research Fellow


In the latest episode of the Eurozone’s ongoing fiscal drama, the Greek Parliament has approved a €28 billion austerity plan aimed at winning €12 billion in emergency EU/IMF funding to stave off default. Today’s parliamentary vote, which centered on the specific steps needed to implement the measures, also passed.

On the face of it, this can be easily construed as a decisive step toward resolving the crisis. Eurozone donors will be able to keep the Greek government solvent while protecting their own economies. Letting Greece default would undermine many of the currency area’s banks and reduce investors’ willingness to lend to other Eurozone states with dubious financial outlooks. While the Eurozone may be able to cope with unsustainable levels of debt in Ireland and Portugal, which have also received bailout packages, it may not be able to support Italy, Spain, and Belgium if they go under.

So, from an economic standpoint, bailing Greece out is a no-brainer. But at the moment, it’s far from clear that donor governments will be able to command the political support needed to continue doing so for years to come. It’s widely understood that Greece will need funding until, and possibly beyond, 2014. The question is, will domestic political forces in Germany (the biggest donor, aside from the IMF) and Greece (the reluctant enactor of austerity measures) allow the bailouts to continue?

A poll conducted earlier this month found that 60 percent of Germans are opposed to extending a second round of assistance to Greece; a mere 33 percent support it. This is consistent with German attitudes toward last year’s bailout of Greece, which 51 percent opposed. Support is also dangerously thin in Greece, where 47.5 percent wanted parliament to reject the austerity plan. The German public’s opposition could soften if the French and German governments convince financial institutions to share the bailout burden by “voluntarily” holding on to Greek debt for a longer period than they otherwise would. But this is unlikely to make a large enough dent given the fact that most of Greece’s lenders are public institutions. Nor are Greeks likely to tolerate much more austerity.

The reality is that the Eurozone’s Achilles heel is turning out to be its level of solidarity. It’s true that its leaders have agreed to a slew of measures designed to enhance the “economic governance” of the Eurozone, including: closer EU surveillance of member states’ economic and fiscal policies; the creation of the permanent European Stability Mechanism (ESM) to replace existing temporary bailout mechanisms; and improved financial regulation. But the ESM – the key element of this package that will effectively institutionalize Eurozone solidarity by serving as a permanent bailout mechanism – will not come online until 2013. By then, it may be too late.


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