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EU seems paralyzed by the realization that Greece and other profligate spenders could drag the whole continent back toward the economic abyss.
Greece adopted its own austerity budget around Christmas and Portugal is due to announce its own austerity budget this week, having been told by the EU that it must get its deficit down from 8 percent to 3 percent of GDP by 2013. The vultures will be watching carefully.
While Ireland’s austerity budget calmed the waves battering it, similar promises from the Greek and Portuguese governments, whose labor unions and other political realities offer them less room for maneuver, are being discounted heavily.
Greeks bearing gifts …
Greece, in particular, has had a difficult time being taken seriously. Greece’s prime minister has promised to cut his nation’s annual budget deficit — now running at 12.7 percent of GDP — down to 3 percent within four years. Last week, his finance minister, George Papaconstantinoue, denied Greece was seeking help either from Brussels or the IMF, in spite of widespread reports that his government is in desperation talks with both.
Even as euro-optimists point to a recovery in exports and industrial activity in the big EU economies of Germany and France in the last quarter of 2009, the prospect that one or more EU states could default on their international financial obligations has sent the euro into a nose dive.
Cynics feel this may suit both just fine for now — after all, the lower euro helps their export-oriented economies recover. But that’s the epitome of short-term thinking. An EU state in default — in effect, a country that goes the way of Iceland in 2008, Argentina in 2001 or Russia in 1998 — would trigger a Mediterranean tsunami as it tumbled into the sea, eventually derailing Europe’s recovery and reverberating far beyond.
The EU’s big nations surely know this and will ride to Greece’s rescue. Through the crisis, which really took root when Dubai experienced a “near death” brush with fiscal reality in late November, the EU’s top officials have refused to commit to any rescue, sticking with the German strategy in what looks like a vain hope that the errant PIIGS could be scared straight.
Time is now running out, however. In effect, regardless of what the Greek finance minister says publicly, the EU is now considering a kind of sovereign TARP program for its weakest members, and like the TARP in America, the idea of subsidizing governments which over-borrowed and make bad bets will be no more popular over there than it was here — no matter how necessary either turn out to have been.