GLOBAL FINANCIAL CRISIS: by Peter WestmoreNews Weekly
Greek crisis tips Europe towards double-dip recession
, March 6, 2010
Following the Wall Street collapse of August 2007, Western Europe followed the United States into recession, which was alleviated by massive injections of public funds in 2008 and 2009.
Now these stimulus packages are returning to haunt Western European countries. Several governments, including those of Greece, Spain, Portugal, Ireland and Italy, face mounting difficulty in paying off their soaring deficits, and there is a fear that some will default.
Concern about government debt default by Greece is the most visible sign of the crisis.
Greece, a country of about 11 million people, currently has a government debt which exceeds its gross domestic product (GDP). Since 2007, its debt has risen steadily from 95 per cent of GDP to an estimated 125 per cent this year. Government debt now stands at about €300 billion ($A500 billion).
Its current budget deficit is 12.7 per cent, far higher than permitted under EU rules; and this year the Greek Government will need to borrow €53 billion ($A90 billion) to cover its deficit, prompting fears of sovereign debt failure, where the government is unable to borrow any further money to pay its debts.
Debt-servicing now costs Greece over 11 per cent of GDP, and it has to pay more interest on borrowings because its credit rating has been downgraded.
To deal with the crisis, the socialist government of Greece has announced an austerity plan, which imposes a freeze on public sector salaries and cuts in pay bonuses, cuts in the size of the public service, higher taxes on property, fuel, alcohol and tobacco, and a gradual rise in the retirement age to reduce pension payouts.
The George Papandreou Government has also promised to crack down on tax evasion, but faces opposition not just from his own supporters, but also from farmers. Tens of thousands of Greeks have participated in strikes in Athens, Thessaloniki (also known as Salonika) and other cities.
All these measures are certain to increase Greek unemployment from the current 10 per cent level in 2010.
While leaders of the European Union have said that they are willing to stand behind the Greek Government's plan, promising "determined and co-ordinated action", there are no details as to how this is to be done.
Leaders in the two largest economies in Europe, Germany and France, are sceptical about committing their own capital to rescue the Greeks from what is perceived to be self-inflicted damage arising from years of irresponsible fiscal policy.
German Chancellor Angela Merkel said the EU countries would "stand shoulder-to-shoulder with Greece", but gave no indication that she would support an EU bail-out.
German reluctance is based on the fact that the German economy itself recorded negative growth in 2009, investment is weak and unemployment is rising. If Berlin steps in to provide Greece with loans, Germany will have to pay more interest on its own national debt, and German taxpayers will end up paying the bill.
Some Germans are arguing that financial assistance to Greece may be unconstitutional and break EU rules. However, if Germany and other EU states fail to step in, there is concern that Greece's default will drag down German banks, and there could be a run on other troubled economies in Europe, most immediately Spain and Portugal, but further down the track, Italy and Ireland.
Spain's problems arise in part from the fact that its economy - the fifth largest in Europe - is still in recession, with unemployment still rising and its property market in steep decline.
Over the past three years, its gross debt has risen from about 36 per cent of GDP in 2007 to 66 per cent this year. Unemployment is over 19 per cent, and still rising. The International Monetary Fund has predicted that Spain's GDP will decline by a further 0.6 per cent this year.
Other economies are also in deep trouble. Portugal, with a population of about 11 million, has seen gross government debt rise from 63 per cent of GDP in 2007 to 85 per cent this year.
For many years Ireland was one of the EU's outstanding economies; but its gross public debt has risen from 25 per cent of GDP in 2007 to 83 per cent this year, as a result of a government-funded rescue of two of Ireland's largest banks, the Bank of Ireland and Allied Irish Banks. Unemployment is now over 13 per cent.Insufficient money
The fear is that the massive increase in government demand for capital to bankroll public sector deficits will leave insufficient money for private sector investment. This situation will be aggravated by rising taxes, and risks pushing the countries of Western Europe, including the United Kingdom, into a double-dip recession, or, at the very least, a long, slow and painful recovery.
The implications of a debt crisis in Europe are profound. It will certainly cripple the economies of Eastern Europe, which are largely funded from Germany and other Eurozone nations, and could spread to the United States whose economy is also still in trouble.