Greek agony must galvanize the euro periphery

April 23, 2010

The emergency numbers are ringing. Greek 10-year debt yields are ballooning to well over 8 percent. The country cannot sustainably finance itself. The debt of other troubled euro zone countries — Portugal, Spain, Ireland and Italy — is vulnerable to contagion. Help for Greece from the International Monetary Fund and European Union can’t come too soon. But the probable rescue must be a spur not a salve, in Greece and outside it.

Germany is reluctant but the EU’s hand is being forced by the markets. The much-discussed help must surely come. The IMF will begin supervising Greek economic policy. But the task of making the country solvent looks immense.

The Eurostat statistical office has just revised up Greece’s 2009 fiscal deficit to 13.6 percent of GDP. The deficit before interest payments, the so-called primary deficit, was 8.5 percent of GDP. The primary position must move to a substantial surplus of, say, 4 percent of GDP to prevent the debt burden, already 115 percent of GDP, from spiralling further.

A 12 percentage point of GDP improvement in the government’s finances is almost unthinkably big. It doesn’t help that Greece can’t devalue to help its exports and tourism, nor that Greece is already troubled by protests against austerity. The market may doubt Greece can make it, even with help. The fear of default, high yields and contagion risk may all persist.

It’s true no other euro zone country is in as bad a position. Only Italy has proportionately as much debt and only Ireland as big a deficit. But it is also clear that other euro zone economies are on an unsustainable path of fast-rising debt and must take drastic action to reduce their deficits.

Greece’s prolonged agony shows that Germany and other countries are wary of being drawn in to what may be a long commitment to prop up their neighbours. Once Greece is helped, as it seems certain to be, patience may be exhausted. The IMF may become the only Samaritan, and an untender one.

The Greek torment and probable rescue is a warning. Its neighbours can see the Greek agony. They need to be brave and act fast if they are not one day to share the same fate.

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My father was made redundant three times during my childhood. Each time our family cut its expenditure by more than half. We got by. So I have nothing but contempt for civil servants who think that being asked to take a small salary reduction to get their country out of a crisis is more than they can be expected to accept.

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