Debt woes expose Eurozone cracks

FEAR of contagion has forced EU ministers to accept that they must support Greece and in doing so, they may manage to sweep the current crisis under the carpet. But whatever action is taken, it will not solve Greece’s structural problems. The real issue is that the country is not properly equipped to adhere to the strict criteria of the Maastricht Treaty.

This should hardly be surprising – not only did Greece fudge its figures to become a member of the Eurozone, it is wildly optimistic to assume that it can turn its situation around by the end of 2012. While the budgetary criteria may be strict, the rules on controlling deficits are woefully inadequate. Even if Greece fails to restore fiscal order, the worst that can happen is that it could be fined – clearly no solution.

For decades EU countries have been sidestepping the issue of divergent fiscal policies and what greater convergence would mean for individual sovereignty of member states. Greece’s fiscal problems have highlighted the difficulty of achieving monetary union in the absence of either stronger harmonisation over fiscal policies or a will to maintain transfer payments to countries in need.

But is Greece alone? The general consensus is that budgetary management in Spain and Ireland in recent years has been better than that of Greece. This is reflected in the wider spreads on Greek bond yields and the fact that the public debt to GDP ratios of these two countries still remain below the Eurozone average.

That said, neither Spain nor Ireland is out of the woods yet – both could still see a further contraction in economic growth this year. Ireland has already bailed out its banks, shifting the debt caused by the bursting of its housing bubble into the public sector. Spain could find itself in a similar position.

Earlier this month, the European Commission’s Joaquin Almunia, said Greece, Spain and Portugal had all seen a permanent loss of competitiveness since joining the euro. In most countries, this would be associated with a weakening currency, boosting exports and inflation.

Greece, Spain, Ireland and Portugal do not have this option. They are faced with the prospect of rebuilding competitiveness through a reduction in wages, while also tackling healthcare, education, welfare and pension reform. Such adjustments may take at least a decade. Any “solution” found for Greece should not be an end to the issue, but rather a start to discussions about strengthening fiscal controls within the Eurozone.

Greece’s fiscal position has uncovered cracks that will not disappear swiftly. This can only weigh on the euro. It is likely to fall further during 2010.

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