Does Europe need another week full of panic? Not really. But that seems to be on order anyway. Spain’s borrowing costs are already rocketing to unsustainable levels as investors worry that the world’s eleventh-largest economy is mired in endless recession with no chance to ease its debt burden. And, if that wasn’t enough, there’s now renewed chatter that Greece might get kicked out of the euro zone.
Greece’s problems look severe. To date, the country has received pledges of €240 billion ($291 billion) in rescue aid from the European Community, the European Central Bank and the International Monetary Fund. In return for that assistance, however, Greece was supposed to whittle its debts down to 120 percent of GDP by 2020.
It’s never been clear what the rationale behind this target was. At the time it was proposed, many economists called it arbitrary and unrealistic. Greece is already trapped in one of the worst depressions in modern history. The government is under intense public pressure to ease up on the €12 billion in planned tax hikes and spending cuts in 2012. What were the odds that Greece would ever meet this goal?
Yet IMF and European officials declared the 120 percent target sacrosanct. And it could prove fatal for Greece. Over the weekend, Der Spiegel quoted a few anonymous E.U. officials who agreed that there was no way Greece would hit its debt targets. In that case, the Greek government will likely need another €10 billion or €50 billion of aid just to stay afloat. But according to Der Spiegel, neither Germany nor the IMF appear willing to open the spigots again. Here’s one quote:
The Süddeutsche Zeitung cited an unnamed German government source as saying it was “inconceivable that Chancellor Angela Merkel would again ask German parliament for approval for a third Greece bailout package.”
And here’s a quote from Germany’s economic minister (who also happens to be vice-chancellor under Angela Merkel):
Meanwhile, German Economy Minister Philipp Rösler said on Sunday he was “more than skeptical” that Greece’s reform efforts will succeed. “If Greece no longer meets its requirements there can be no further payments,” he said in an interview with German public broadcaster ARD. “For me, a Greek exit has long since lost its horrors.”
The IMF and euro zone will make a decision on further aid in August, but does this sound like a country that wants to make things work? Some German newspapers are rejoicing at the latest hard line. Here’s the Bild: “At last! This signal was overdue. Greece is neither able nor willing to solve its problems.”
The center-left paper Süddeutsche Zeitung, meanwhile, looked at the practical results. If the IMF and Europe refuse to extend further aid, then Greece will have to declare itself insolvent by September. At that point, the European Central Bank will have to decide whether to shut off financing for Greece. If it does, Greek Prime Minister Antonio Samaras will be forced to find a new currency. “Such a step,” the newspaper concluded, “would entail incalculable risks for the Greek government. … But it will probably have to embark on this adventure.” (Those “incalculable risks,” by the way, include a potential 50 percent drop in Greece’s GDP in the first year alone.)
Of course, if Greece exits the euro, everyone will start worrying that Spain or Italy could be next. Investors could start betting on a Spanish exit, which would risk becoming a self-fulfilling prophecy. Which means the euro zone will likely need a bigger bailout fund to quell any panic. But Europe’s new €500 billion ($605 billion) European Stability Mechanism won’t be ready until at least mid-September, when Germany’s constitutional court decides whether or not to block the fund’s creation. Without that fund, a Greek exit might not be so horror-free after all.