Europe is facing an increasingly divisive choice in the effort to resolve its economic crisis: a larger transfer of wealth from stronger nations such as Germany to weaker ones such as Greece, or a default by one or more nations that, if not managed properly, could touch off a wave of bank and corporate failures.
Those stark options — requiring either deep political changes in European governance or a financially risky national debt restructuring in the heart of the developed world — are considered by a wide array of officials and analysts as the likely endgame in the protracted debate over the future of the 17-nation region that shares the euro as a currency. Three of those countries are receiving rescue loans from the International Monetary Fund, which in a Monday analysis said Europe’s lack of a “cohesive” response to the crisis “threatens to overwhelm” the region’s economy.
A growing number of analysts and officials, meanwhile, say that the existing emergency programs in Greece and other weak nations are only delaying an ultimate reckoning over how the euro-area economy is structured and run.
Crisis talks continued in Europe on Monday over how to meet Greece’s imminent need for cash. The European Union and the IMF said they would delay further emergency loans until the government in Athens approves a new round of budget cuts and tax increases.
The government of Prime Minister George Papandreou is struggling to remain in command of a nation beleaguered by 16 percent unemployment and is increasingly resistant to an internationally mandated austerity program. A vote of confidence in Papandreou’s reshuffled cabinet is scheduled for Tuesday, and a parliamentary vote on the next round of austerity measures is expected next week.
Those critical votes may win Greece an additional $17 billion in emergency loans.
But recent private and official analyses have made clear how far Greece and Europe remain from a long-term solution to the issues that have roiled global stock markets and threatened the world economy with the type of financial seizure that followed the collapse of Lehman Brothers in 2008. Just as banks worldwide stopped lending because of uncertainty surrounding the subprime mortgage market in the United States, there is concern that the debt of “subprime” nations in the euro zone is spread so deeply through Europe’s banks that a default would cause the broader financial system to grind to a halt.
Although the issue has been on Europe’s agenda since 2009, there has been only halting progress toward an ultimate fix that, according to the IMF and private analysts, will require the 17 euro-zone nations to more closely integrate their economies.
The IMF analysis Monday criticized the “unproductive” debate among European leaders about shorter-term solutions, and said the region needed to confront the fact that, a little more than a decade after it was introduced, the euro has produced a Jekyll-and-Hyde economy. As Germany speeds ahead, other nations confront “daunting challenges, with very high debt levels, severe competitiveness problems, and fragile banking systems.”
There is little expectation that it can be turned around in the two to three years struggling countries such as Greece are being granted under existing international rescue efforts.
The economic reforms demanded of Greece when its bailout program was set in May 2010, are “increasingly showing to have been unrealistic in substance and far too optimistic regarding the timetable,” said Jens Bastian, a visiting professor at Oxford University and analyst at an Athens-based think tank.
As Greece’s three-year program has slipped behind expectations, analysts and officials have focused on the longer-term implications: that the country, and other weak links in the euro area, will either need more direct help from their neighbors, or be allowed in consultation with the rest of Europe to restructure their debts in a sort of organized default.
Since German, French and other European banks have much at risk in Greece — tens of billions of dollars in loans, investments, and government bond holdings — a restructuring has been considered off-limits by many euro-area officials who don’t want to subject those banks to losses and trigger a crisis in their own financial systems.
But the existing international strategy, of helping indebted countries by loaning more money, may just be delaying the inevitable, Arnab Das, of Roubini Global Economics, wrote in in a Monday analysis.
“There is no way an excessive debt problem can be solved by yet more debt,” Das wrote, saying that some effort to reschedule or modify Greece’s more than $400 billion in bonds would give the country “breathing space for structural reform to take hold.”