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More Trouble Ahead

The European Union's Dangerous Game

By MARK WEISBROT

Perhaps the wild swings in financial and stock markets over the last week will make people give closer scrutiny to what is going on in Europe, which would be a good thing for the world. According to most news reporting, markets are worried about a potential default by Greece on its sovereign debt, and the possibility of this spreading to other countries, including Portugal, Spain, Ireland and Italy.

The agreement by the European Union and International Monetary Fund to provide up to $960 billion of support to the weaker economies, as well as to financial markets, has appeared to calm investors worldwide for now.

But this does not resolve the underlying problem, even in the short run. The problem is one of irrational economic policy. The Greek government has reached an agreement with EU authorities (which include the European Commission and the European Central Bank), and the IMF that will make its economic problems worse.

This is known to economists, including the ones at the EU and IMF who negotiated the agreement. The projections show that if their program “works,” the country’s debt will rise from 115 percent of GDP today to 149 percent in 2013. This means that in less than three years, and most likely sooner, Greece will be facing the same crisis that it faces today.

Furthermore, the Greek finance ministry now projects a decline of four percent of GDP this year, down from less than one percent last year. However these projections are likely to prove overly optimistic. In other words, the Greek people will go through a lot of suffering, their economy will shrink and the debt burden will grow, and then they will very likely face the same choice of debt rescheduling, restructuring or default – and/or leaving the Euro.

The European Union's Dangerous