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| The Financial Stake of a United Europe |
| (2011-10-04) |
| Last updated: 2011-10-05 15:49 EET |
High-ranking EU officials have promised they will prevent Greece from defaulting on its debt and that the country would stay in the Euro zone. Greece still has a long way to go on its path to economic recovery, and its financial situation remains uncertain.
Following a marathon meeting in Luxembourg, the Eurozone finance ministers on Monday postponed a decision regarding the disbursement of a new installment of the bailout package for Greece, pending the report of a three-party mission from the EU, the European Central Bank and the International Monetary Fund.
The group of experts is assessing the financial situation in Greece and the extent to which the Greek government has met all the criteria stipulated in the bailout package. Concern over the country’s defaulting on its debt continues to surge and disconcert financial markets. Eurogroup president Jean-Claude Juncker has dismissed rumors referring to a possible Greek default or to the country’s Eurozone exit.
The EU’s Finance Ministers appreciated the austerity measures introduced by the Greek government, although they have called on authorities to accelerate their privatization programme and provide for further budget trimming for the 2013-2014 period. Greece, a country commonly seen as the Achilles’ heel of the single currency zone, must be saved, even by resorting to private loans from EU member states, but not without certain requirements.
Finland has demanded guarantees in exchange for its loans. The EU finance ministers have reached a compromise regarding these guarantees, something that for the past weeks had been standing in the way of a second rescue package aimed at saving Greece from default. Helsinki was threatening to freeze the entire financial rescue mechanism unless it received certain guarantees, which would have speeded up Greece’s financial meltdown.
EU leaders are trying to avoid such a scenario, as a potential Greek default would severely affect European banks and endanger the future of the single currency, thus leading to a new global crisis. For the time being, Greece’s prospects of recovery are not rosy. According to the budget bill, the country will miss its budget deficit target established in the second rescue agreement signed with international monetary institutions.
The Greek government is estimating a budget deficit of 8.5% of its GDP for 2011, above the 7.6% threshold previously agreed upon with its foreign lenders. The shortfall in the deficit target means Greece would require an additional 2 billion euros, which would translate as further tax hikes and wage cuts in the public sector, in addition to the austerity measures introduced two months ago.
The budget draft law also estimates that the Greek economy will shrink by 5.5% by the end of the year, with government sources saying a further 2.5% drop in the country’s GDP can be expected next year as well. The figures in the budget bill are lower than the economic forecast underlying the 109 billion euro bailout agreement, which estimated an economic growth rate of 0.6% for 2012.
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