It sometimes seems as though every day we are treated to a new twist or turn in the roller coaster that is the European debt crisis. While it appears as though the worst is passed, that the Euro is safe and that the EU powerhouses will finally pull the continent through the economic downturn, news from Europe continues to put a wrench into any rosy forecasts. Most recently, negotiators in Greece agreed to severe austerity measures in exchange for a 130 billion Euro bailout package from the IMF and the EU. This is the good news. The bad news is what came after the deal was announced – a widespread uproar and infighting among Greece’s political order, and calls for yet another 2-day strike by the country’s angry citizens.
While such a reaction was not unexpected, the situation nonetheless calls Greece’s bailout hopes and stabilization prospects into question once again. In order to implement the EU deal, Greek Prime Minister Lucas Papademos will likely need to restructure his cabinet, a move that could spell a collapse for the unity government and another round of elections. Of course, Papademos will also have to address the turmoil in the streets and the grinding halt in the workforce if he wants to assure government ministers to vote for the austerity measures in the face of widespread opposition. The measures include pension cuts, minimum wage reductions, widespread layoffs, and collective bargaining impairments. Although they are still demanding over $400 million more in cuts in the long term, eurozone finance ministers sent global stock markets higher by agreeing to the measures in principle.
Greece has a debt that stands at 160 percent of its GDP. Its unemployment rate, meanwhile, hovers somewhere between 20 and 25 percent. European leaders want to see both of these numbers substantially slashed.
Even if Greece can get austerity cuts passed and make turn a bailout package into reality, a few larger questions looms on the horizon. Will the Eurozone recover? Can the continent handle another debt crisis? Considering the rapid pace at which government debt is rising relative to GDP in several countries – chief among them Spain, Portugal, and Ireland – it’s not inconceivable that the Greek debt crisis will quickly give way to a Spanish and Irish incarnation. Will those countries be able to successfully implement austerity measures without threatening political and social disorder? It’s a question that few European finance minister are willing to ask but one that many have probably considered.
All signs suggest that Greece is not the final roadblock in the EU’s effort to emerge from the financial turndown. It is likely that future bailouts and austerity plans are in the future for several other countries. While Greece may have shouldered most of the burden this time around, there’s little doubt that, the longer this issue persists and the more widespread it becomes, the more likely all of Europe is to descend into a period of mid-term stagnation. Furthermore, many analysts predict that large-scale austerity measures will only initiate a negative feedback loop that stifles recovery and pushes Europe further into a new recession.
In Europe, recovery and growth will both depend highly on the power of state resources. Too much austerity, and growth will be difficult to spark. Too little, and spiraling debt will only further exacerbate budgets and markets. In order to move forward, then, as a strong and unified continent, Europe needs to forge an appropriate path between the two – in Greece as well as in Spain, Portugal, and Ireland. Until that happens the global economy will continue to feel its reverberations.
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